This time is different

The chart below compares the Wilshire 5000 broad market index (light blue) to the money supply (MZM or “at call” money). The previous two recessions show a surge in the money supply (green circles) as the Fed injects liquidity into financial markets to forestall a deflationary spiral. In both cases, stocks took more than two years to react, with the low-point reached 8 quarters after the Fed started to inject liquidity in Q1 2001 and 9 quarters after liquidity injections commenced in Q3 of 2007.

MZM Money Supply and Wilshire 5000

It took almost 13 years for the index to make a new high after its Q1 2001 Dotcom peak and 5.5 years after its Q3 2007 peak (values are plotted relative to GDP).

The recovery in 2020 was quite different. The index formed a low two quarters after the Fed started to inject liquidity and had recovered to a new high in the next quarter.

While the recovery from the Dotcom crash took an unusually long time — because of the extreme valuations — we can still conclude that the latest recovery was exceptional. Record government stimulus caused a surge in disposable incomes, rather than the fall seen in previous recessions.

Disposable Personal Income

The surge in disposable income combined with a sharp fall in consumption caused a massive spike in personal saving, much of which flowed into the stock market.

Personal Saving

Huge inflows caused a surge in stock prices, which in turn led to similar exuberance to the Dotcom bubble of 1999-2000.

“This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity.” ~ Sir John Templeton, in 2001.


While the government attempt to prevent a fall in personal disposable income during the pandemic is laudable, their overreaction caused a massive spike in personal saving — spreading the contagion to the stock market. Stocks are now trading at precarious levels relative to earnings, with no easy way for authorities to engineer a soft landing.

We are not sure how long the Fed can prop up the stock market but are certain that it will end badly for investors who ignore the risks.


Sir John Templeton (1912-2008) was an American-born contrarian and value investor, banker, fund manager, and philanthropist. He founded the Templeton Growth Fund in 1954, which averaged more than 15% p.a. over 38 years. In 1999, Money magazine rated him as “arguably the best stock picker of the century.”

S&P 500 target

My target for the current S&P 500 long-term advance has been 3000 for a number of years. The chart below explains the target calculation.

S&P 500 Target CalculationClick here to view a full screen image.

The Dotcom bubble retraced from a peak of 1500 to a low of 800. Readers who are familiar with my method will know that on a short- or medium-term chart I would simply extend the retracement above the previous peak of 1500 (giving a target of 2300) but long-term charts work better on a log scale.

If we extend the distance between peak and trough above the peak on a log scale chart, we get a target of 2800.

If we do the same for the global financial crisis (GFC), we get a target of 3200.

Mid-way between the two is another important target, of 3000, which is double the previous two peaks at 1500.

Of the three targets, I feel that 3000 is the strongest. Not only because it is the middle target and double the previous peaks, but round numbers are important psychological barriers. The Dow, for example, took more than 10 years to break resistance at 1000.

Now some may feel that technical analysis like this has as much significance as reading tea leaves or consulting your astrological charts. But observation shows that market activity tends to cluster around significant levels (e.g. 1500) or numbers and can present formidable barriers to trend progress.

Primary Support

The next question is: if the market reverses at 3000, how far is it likely to retrace? There is no straight answer, but primary reversals normally retrace between 50% and 100% of the previous gain, or between 25% and 50% of the current level.

There are two major support levels evident on the chart:

  1. The 2100 peak from 2015, a 50% retracement (on a log scale) of the preceding advance; and
  2. The 1500 peak from 2000 and from 2007, marking 100% retracement of the previous advance and also a 50% retracement from the current level.

A lot would depend on the severity of the reaction.

“You watch the market — that is, the course of prices as recorded by the tape with one object: to determine the direction. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.”

~ Jesse Livermore

Black Monday, October 1987

Cross-posted from

What caused the Black Monday crash of 1987? Analysts are often unable to identify a single trigger or cause.

Sniper points to a sharp run-up in short-term interest rates in the 3 months prior to the crash.

3 Month Treasury Bill Rates

Valuations were also at extreme readings, with PEmax (price-earnings based on the highest earnings to-date) near 20, close to its Black Friday high from the crash of 1929.

S&P 500 PEmax 1919 - 1989

Often overlooked is the fact that the S&P 500 was testing resistance at its previous highs between 700 and 750 from the 1960s and 70s (chart from macrotrends).

S&P 500 1960 - 1990

A combination of these three factors may have been sufficient to tip the market into a dramatic reversal.

Are we facing a similar threat today?

Short-term rates are rising but at 40 basis points over the last 4 months, compared to 170 bp in 1987, there is not much cause for concern.

13-week T-Bill rates

PEmax, however, is now at a precipitous 26.8, second only to the Dotcom bubble of 1999/2000 and way above its October 1987 reading.

S&P 500 PEmax 1980 - 2017

While the index is in blue sky territory, with no resistance in sight, there is an important psychological barrier ahead at 3000.

S&P 500

Conclusion: This does not look like a repetition of 1987. But investors who ignore the extreme valuation warning may be surprised at how fast the market can reverse (as in 1987) from such extremes.

Nasdaq breaks its Dotcom high

Tech-heavy Nasdaq 100 broke through its all-time high at 4900, first reached in the Dotcom bubble of 1999/2000. Follow-through above 5000 would signal another primary advance. Bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure, possibly profit-taking at the long-term high.

Nasdaq 100

The daily chart of the S&P 500 also shows bearish divergence, but on 21-day Twiggs Money Flow, indicating only short-term selling pressure; reversal below zero would warn of a correction. Target for the advance is 2300*.

S&P 500 Index

* Target medium-term: 2100 + ( 2200 – 2000 ) = 2300

The chart below plots Forward PE (price-earnings ratio) against S&P 500 quarterly earnings. Apologies for the spaghetti chart but each line is important:

  • green bars = quarterly earnings
  • orange bars = forecast earnings (Dec 2016 to Dec 2017)
  • purple line = S&P 500 index
  • blue line = forward PE Ratio (Price/Earnings for the next 4 quarters)

S&P 500 Forward PE and Earnings

The recent peak in Forward PE was due to falling earnings. Price retreated at a slower rate than earnings as the setback was not expected to last. Forward PE has since declined as earnings recovered at a faster rate than the index. But now PE seems to be bottoming as the index accelerates. Reversal of the Forward PE to above 20 would be cause for concern, indicating stocks are highly priced and growing even more expensive, as the index is advancing at a faster pace than earnings.

Remember that the last five bars are only forecasts and actual results may vary. The only time that the market has seen a sustained period with a forward PE greater than 20 was during the Dotcom bubble. Not an experience worth repeating.

The Joseph Cycle: 7 Fat years and 7 lean years

George Dorgan writes:

Since both the positive and the negative phases of a financial cycles take around seven years, financial cycles are sometimes called “Joseph cycle“, from the biblical prophet Joseph that speaks of seven good and seven bad years. The financial cycle connected to expectations about real estate prices, is also called credit cycle…..After the bust of dot com bubble in 2001, the Fed lowered interest rates. Credit was easily available and private debt strongly increased. Government debt remained relatively stable.

Only in few countries like Germany, Japan or Switzerland people were far more cautious, because they had seen a real estate bubble bust in the 1990s. The leveraging phase finally ended in 2011, in China and in some other emerging markets…..

We think that the reduction of debt will continue to be the main driver of global economies during the next Joseph cycle, in the next seven years. After the US lowered debt levels until 2011/2012 it is now time for Europe except Germany and Switzerland and Emerging Markets….

Read more at Debt, the Joseph Cycle Determinant between 2011 and 2017 -SNBCHF.COM.