Monday, August 18, 2014
On the past two US market tops
En passant of nothing, I'd like to share a personal thought with you.
All this time, for the past couple years, in the background I've been looking at stock market performance from the late 80s til today, going through charts of US equities and stuff. Among other things, I thought it'd be educational for me to look at lots of old charts to try and figure out what makes tops and bottoms.
I'm a holistic thinker, I work best when I present myself with an overwhelming pile of information and set out to construct a narrative that explains all of it.
Anyway, I've come to a realization about the "percent above 20SMA" indicator.
Bears like to chart the percent above 20SMA, so that they can find another excuse to scream about market tops. Problem is, it doesn't work that way.
I already learned over a year ago that the "NYSE percent above SMA" is a lying indicator. Apparently there's a large number of corporate bonds that are traded on the NYSE; so you can easily have a situation where the NYSE percent above SMA drops while stocks advance, if it's an environment where UST yields are increasing and pushing down corporate bond prices.
But recently I've started to look at the big rolling top of 2006-2008, and I've realized that narrowing of the percent above SMA that you see at a market top is a process that takes years, not weeks.
If you owned a basket of S&P 100 stocks in 2006, and you were magically selling at the top for each stock, in 2005-6 you'd already be dumping AMGN and MSI. Next up would have been a bunch of the healthier tech stocks like EMC. By 2007 you'd be dumping everything else, over the space of a year. The last to go would have been the oils (XLE, CVX and the smaller players like EOG and COG), because the oil price was spiking before the US market collapse. Over all this time, the S&P 500 index really didn't advance at all.
Point being, the creation of the cyclical top in 2006-8 was a long, drawn-out process, also confused by the late performance of oil. The "% above SMA" indicator moved over a process of years, not over a month. Importantly, the index went nowhere.
So what is it when the "NYSE % above SMA" drops over the space of a month, not years?
As above, if the equity index continues to advance, it might just be that UST yields are increasing, thus dropping the bonds side of the NYSE. That's decorrelation and it's bullish.
If the equity index has stalled, then a drop in NYSE % above SMA seems more likely to just be a symptom of a market rotation. We've already seen that several times this cycle.
NYSE % above SMA has to drop over a long period, while the market goes nowhere, for it to be a proper top.
All this, by the way, applies to 2007 and not 2000.
Cuz the other thing I've learned by going back and watching the charts was that the 2000 top was followed (outside of the tech space) by a slow market decline, while the 2007 top was followed by an accelerating fear explosion. After 2000, the market took a good 2 years to drop to the bottom; yes, tech stocks got slaughtered, but boring equities took a much gentler move downward.
In 2008, the downward spike was explosive, the volume was insane (literally 50% of a float could trade in 2 weeks for a lot of stocks) and there were a lot more stupidly-good deals in the market at the bottom. You could buy Ford at $2, and buying many smaller (not top-50) stocks could give you fantastic (>500%) gains if you bought at the bottom and held til today.
The 2000 top was also a quick event, while the 2006-2008 top was a very long and drawn-out process.
Basically, the 2000 top was a radically different top than 2008. I guess that's because we were worried in 2008 that there would be bank runs and mass unemployment. Basically another Dirty Thirties.
Which, by the way, is what they've been having in Europe right now. Which is no surprise that, after the 2008-9 bottom, it was pointless to buy any European NYSE-listed equity. They've all gone bloody nowhere in the past 5 years, and it's because Europe has remained in essentially a Thirties-style economic depression.
It's been different this time, because they have social services to keep people from starving to death. But they've still gone through a stupid depression, which as Krugman notes they've intentionally inflicted on themselves.
Anyway, there's some background thoughts for y'all.