Monday, February 23, 2015

Two years on, the stock markets are still setting records

Two years ago, I predicted one of two futures after the first time I wrote about a record S&P close.
As for what's coming next, either Thursday's action was the top of the market or it's off to the races, and people on Wall Street know it.
For the past two years, it's been off to the races.  Last Friday, the Reuters headline read Dow, S&P 500 close at record highs on Greece debt deal.
The Dow and S&P 500 ended at record highs on Friday while the Nasdaq notched an eighth straight day of gains after Greek and euro zone finance ministers reached a deal to extend heavily indebted Greece's financial rescue by four months.

The agreement removes the immediate risk of Greece running out of money next month and possibly being forced out of the single currency area.

The Nasdaq matched an eight-session winning streak from a year ago and inched closer to its 5,132.52 all-time intraday high, reached in March 2000 just before the dot-com bubble burst. The S&P 500 ended slightly higher for the week as well, its third straight week of gains.
All of the S&P 500 sectors ended in positive territory, except energy, which dipped 0.3 percent. Apple, which hit another record closing high, gave the S&P 500 and Nasdaq their biggest boost.

The Dow Jones industrial average rose 154.67 points, or 0.86 percent, to 18,140.44, the S&P 500 gained 12.85 points, or 0.61 percent, to 2,110.3 and the Nasdaq Composite added 31.27 points, or 0.63 percent, to 4,955.97.

For the week, the Dow was up 0.7 percent, the S&P 500 was up 0.6 percent and the Nasdaq was up 1.3 percent.
The NASDAQ has less than 200 points until all three stock indexes have recovered for their previous highs.  Too bad I didn't get in the market back in 2009.  Of course, as pessimistic as I have been the past two years, I probably would have gotten out by now.  Speaking of which, I wrote about someone I was sure would get out of the market soon when the S&P 500 first hit a post-recession high two years ago.  Continue over the jump for my follow-up to that prediction.

In March 2013, I made this confident forecast about a friend's behavior.
I know one person who probably isn't going to take any chances on the market going higher. Back in 2010, Michael Alexander concluded one of his most recent updates on stock cycles with his strategy regarding the market.
My strategy this time is simple. I expect we will have at least a few years of expansion after 2010, during which time the market should advance as it did in the last expansion. The S&P500 today is about where it was in early 2005. In the three years afterward the market briefly reached the 2000 highs. I see no reason why this cannot happen again and when it does I plan to sell at that level, even if it looks certain that the market will proceed higher.
I'll be watching to see if he follows through. Knowing Mike (and I do), he will and he'll post about it.
I forgot to check in until now, but it turns out I was right; Mike sold and he wrote about it.
Over the May through July period I gradually shifted out of stocks as the S&P 500 reached the upper 1550-1600 period. I sold [m]y last position last month when the index was in the low 1600's.
That was posted at the end of July 2013.  Mike knew that the market could last a while longer, but he wasn't taking any chances.
There is still room to rise and the current bull market will likely run quite a bit longer, particularly as the length of the current business cycle, at least than 6 years, is still quite short. I had made a similar argument in December 2007, and was wrong. So this time I decided to sell as soon as P/R indicates a relatively overvalued market.
Mike was expecting a market top in 2008 based on the political business cycle propping up the end of the bull market he predicted based on his reading of stock cycles.  He wasn't counting on the confluence of high oil prices and the housing bust spreading to stocks, to say nothing of the bad luck of the Bush presidents with the economy.*  Honestly, he was off by only two months; if the market top had been in January 2008 instead of November 2007, he'd have been fine.

As for what it will take for Mike to get back in the market, it will be the next recession.
The bet I am making is that there will be another downturn as there was in the past and this downturn will send P/R below its previous low of 0.49. If I assume the next downturn will have happened by 2020, seven years from now, I can extrapolate the R growth curve to estimate a value of about 2550 then, which when multiplied by 0.49 gives a value of 1250 for the next bottom, well below today's levels, at which to move back into stocks.
Based on my prediction that the next recession won't start until late 2016 or early 2017, that won't happen until 2018 at the earliest.  That's OK.  Mike's in for the long haul.

*I know more about both real estate and oil than Mike and I have a story about Mike screwing up a forecast about oil to prove it.  In 2003, he thought oil would return to 1998 levels within a decade and devised an investment scheme based on that prediction.  I told him that would never happen and that he shouldn't include that in his next book.  His response was that it only had to work once.  I told it would only work once if he was lucky.  After a dozen years, I'm still right; oil prices never dropped that low again.

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