S&P 500 Slow-Motion Crash by Adam Hamilton For as long as humans have enjoyed huddling around a warm campfire and enjoying fellowship with their friends, people have always craved a good story. From the epic poetry of legendary Greek storyteller Homer of almost three millennia ago to modern sagas like George Lucas' Star Wars series, there is nothing like a good story to lift our spirits! While epic stories have taken many different forms through the ages, one could argue that among today's most popular heroic storytelling formats is that all-American staple, the action movie. Being a guy, I have to admit I love action movies. While television generally annoys the heck out of me, it is such a wonderful diversion to go catch a movie on the giant silver screen and be transported to a different world for a couple exciting hours. Although a good heroic story is crucially important to make a stellar action flick, the real star is truly the actual action sequences themselves. One of my all-time favorite action movies is 1999's amazing "The Matrix." If you are one of the few people left in the First World who haven't seen it yet, it is a surprisingly deep tale about a dark future where humanity is trying to escape from a virtual-reality simulation created by artificial intelligence to enslave them. I liked the movie so much I saw it multiple times in the theaters! While "The Matrix" was graced with several phenomenal action scenes, the now famous over-the-top lobby scene takes the cake. Our hero Neo and his gorgeous sidekick Trinity embark upon a daring mission to infiltrate a building where the bad guys are holding the good guys' leader, Morpheus, hostage. Neo and Trinity calmly walk into the lobby of the bad guys' skyscraper, security stops them, and some resulting magnificent movie mayhem explodes onto the screen. Neo and Trinity proceed to whip out more firepower than the Canadian Army could deploy and an amazing symphony of destruction ensues. Legions of bad guys swarm into the lobby to try to stop our heroes, but they deftly dodge bullets and shoot back with inhuman precision to cap the bad guys. One of the coolest parts about the whole lobby scene is the breathtaking slow motion! Time dilated, a relentless hail of bullets spews forth from various weapons, staccato muzzle flashes like strobe lights, carving explosive holes all over the granite walls. Spent brass cascades out of the breeches of automatic weapons and bounces on the hard shiny marble floor. Our heroes nimbly avoid the blizzards of lead from return fire with acrobatic flair and don't even break a sweat. The signature Matrix lobby scene, in glorious slow motion, is truly an awesome masterpiece of adrenaline and testosterone, dramatically raising the bar by which all future action movies will be judged. The phenomenal slow-motion effects in "The Matrix" remind me a lot of the S&P 500 over the last couple years, which appears to be struggling through a slow-motion crash. I fully realize that "crash" is a very strong word full of all kinds of very definite connotations, but I really can't think of any other way to articulate what is happening in the mighty flagship US equity index other than calling it a "slow-motion crash." The S&P 500 reached its all-time closing high of 1576 in 2007. As of December 31st, the mighty S&P 500 had plunged a gut-wrenching 39.7%, a wicked decline for such a prominent broad blue-chip index.
Bear markets are normal and healthy and fully expected after typical bull markets. Following a supercycle bubble however, a fearsome Great Bear beast much more vicious than a garden-variety bear market rears its razor-sharp claws. From a strategic perspective of a couple decades or so, the enormous S&P 500 bubble of the late 1990s and its current slow-motion crash through which investors are suffering become very apparent. The right end of this chart sure doesn't look like a normal bear market! The white-dotted trendlines outline the long S&P 500 strategic trend that ran from the early 1980s to the mid-1990s, only briefly broken during the heady euphoria surrounding the infamous 1987 stock market run-up and resulting one-day crash. Around 1995, the slope of the already mature S&P 500 rally suddenly leaped northwards, screaming towards the heavens like a ballistic missile unleashed from its concrete silo. With the magnitude of this slope change and the resulting parabolic rise and now fall of the index, it is difficult to argue that the S&P 500 was not in classic bubble territory. The enormity of the S&P 500 bubble can perhaps best be illustrated by comparing it to a normal healthy market return line, marked in yellow above. For over a century the average capital gains portion of the returns on equities has averaged 7.4%, the inverse of the historical average P/E ratio of 13.5. Obviously this 7.4% line will end up at different levels depending on what year it is started, but it is still an important proxy for a normal market. It illustrates the slope of a healthy bull market in average terms, which the S&P 500 bubble deviated about as far as possible from. As I have discussed in many past Zeal essays, I still believe the most important factor in spawning the stock market bubbles of the late 1990s was the incredibly dangerous and reckless actions of the goofy private central bankers who control the US fiat dollar, the bureaucrats at the Federal Reserve. The first arrow in the graph above points to a massive change in the slope of the broad M3 money supply around 1995, indicating an enormous increase in monetary growth rates in the United States. Whenever the wizards at the Fed run the proverbial printing presses to create more fiat dollars out of thin air, those inflationary dollars have to seek out a new home and a great deal of them begin bidding competitively on the already overvalued US equity markets. It is no coincidence that the S&P 500 bubble really ignited after the Fed began aggressively goosing US money supplies in the mid-1990s! It will astound future historians to no end that Bernanke, a famous and brilliant student of economic history, told the world that the markets were dangerously overvalued, and then proceeded to do nothing about it, but throw the credit taps wide open in response to various global "crises".
Any way you slice it though, the fundamental and technical case for the S&P 500 is certainly for another serious downleg approaching, probably not carrying us to the ultimate bottom, but definitely obliterating another significant percentage of already bleeding investors' scarce capital. Once the mighty index trades below its neckline of around 950 or so for a few weeks, the selling pressure will probably intensify immensely as fear increases and investors and traders decide discretion is the better part of valor for now. There is also one additional factor that few folks seem to be discussing that is really troubling, kind of a wildcard that should cause great concern. Check out the light red M3 index line above, the one that is scaled up by three times to make it easier to digest in the context of this graph. When the S&P 500 reached its bubble apex, the Cookie Monster's big head (sorry), M3 was still growing, even accelerating to the upside. Please recall that unbridled monetary and credit expansion are the very seeds of wrath from which mighty equity bubbles are spawned. Throughout the whole early slow-motion S&P 500 crash until this year, M3 was still growing and rising fairly dramatically. Even though broad M3 money was growing, the critical S&P 500 index was falling rather rapidly. But, amazingly enough in light of the Fed's appalling record of mismanaging the fiat US dollar, the broad US money supply has finally leveled and perhaps even begun to tentatively decline in 2002! Now if you are an equity perma-bull, and you are suffering through a once-in-three generation supercycle bust, and the markets have been mauled by the most brutal bear in memory, and you find out that money supply growth is finally flattening and maybe even falling for the first time in over seven years, only one word comes to mind⦠uh-oh! Bear markets typically evolve in three phases. First, the market declines 20% or so but everyone believes it is just a "correction" in a primary bullish trend and no one is concerned. Second, as the decline continues, investors on the periphery of the markets (ie, not mainstream long mutual fund holders) gradually grow fearful and selling pressure intensifies. Each successive major rally fails and new interim lows are carved out. Finally, in the horrific capitulation phase, mainstream investors have reached the outer limit of their pain tolerance and patience and clamber to sell at any price and vow to never, ever even think about owning those infernal stocks again. My guess is that we are well into the second phase now, but I imagine that a flattening or even shrinking broad money supply, which we haven't seen at any time during this bear market bust so far, could make things a whole lot worse in the coming year. All investors and speculators with long or short exposure to the S&P 500 or any of the elite US stocks which comprise it should carefully watch the US money supplies in the coming months for clues as to what is approaching next. With the S&P 500's enormously-overvalued P/E ratio and immensely bearish technical breakdown, I can't help but think that the professionals are selling out like crazy leaving the folks the Wall Street crowd call "suckers," the mainstream working American middle-class with their precious retirement and college savings in the markets, left holding the bag, which is emptying fast. It is truly a tragic sight to behold, but this is the way these supercycle busts always work in history too yet virtually no one seems to heed their hard lessons.
Just as the slow-motion S&P 500 crash is like the magnificent slow-motion action scenes in the movie "The Matrix," so is the general stock market like the concept of the Matrix itself. The Matrix was an imaginary virtual reality computer construct. People trapped within the Matrix perceived one "reality" with their senses but that reality was false. Only by transcending the Matrix could our heroes Neo, Trinity, and Morpheus really understand what was happening and try to save the world. While us private investors can't save the world, we can zealously try to transcend the real-world Matrix of popular opinion on the markets. Rather than living in the confusing world of Wall Street lies and perpetual promises of "the bottom is in" or the profit recovery will roar forth "next quarter," investors can seek to understand the markets as they really are. The markets could not care less about you or me, they just exist. Only by understanding the markets in their actual strategic historical context, with mighty cyclical overvaluations giving way to gaping cyclical undervaluations over decades, can investors successfully beat the market year after year. The few investors outside the Matrix are the contrarians, who fervently strive to understand greed, fear, valuation, and history and do not buy into all the hype and obnoxious lies that mainstream investors eagerly lap up like famished kittens. Like the movie Matrix, only a relatively small number of contrarian investors truly seek to understand the markets while the rest of the investors are trapped inside, by their own choice, and have no hope of escape, blinded by their own delusions.
Yes, and 2002 through 2006, though choppy, was pretty good from the 2002 low. Nobody really knows, analysis depends upon no black swans. Personally good for us day traders who don't keep large positions overnight. Not that some of my "small" "save" positions that I did hold didn't stick me bad!!
Yeah, secular bear market [what the heck is that?] was the watchword in those days as I recall... I read until I saw "grand supercycle" and then my stomach churned a little...
there are two cycles: the buy cycle and sell cycle. Buy cycle stocks go up, and sell cycle they go down.
In this era of consumerism and emergin markets huge demand there is no such thing as sell cycle, everything is headed up north always, so just buy bidu ewz rimm spy and fade the media generated fake credit crunch. Dow 14K EOY