All signs point to March 1, 2017, being recorded by historians as the date of the closing high for the eight year old bull market which began on March 9, 2009. The probability is high that March 1st was also the date of birth for the new bear market.
- The first sign is that S&P 500 is ripe for a significant correction. It’s within 2% of its all-time high:
- The second sign is that the S&P’s PE multiple of 26.14 at April 13, 2017 is the highest in last 10 years with 2009 being the only exception. However, 2009 was an aberration. The earnings for the index’s 500 companies collapsed at a much faster and deeper rate than the share prices of the members during the second half of 2008:
The third sign is that investor sentiment has turned decisively negative. It’s gone from individual investors being euphoric to being cautious at best. The data from the table below is from the weekly surveys taken by the American Association of Individual Investors (AAII) for the six months from October 13, 2016 through April 13, 2017. The Bull-Bear Spread which is a calculation of the difference between the percentage of investors who are bullish versus bearish went from a negative 10.7% prior to the election to a positive 9.6% after Donald Trump was elected President. Prior to the election it had been negative for the prior four consecutive weeks. As of April 13th the Bull-Bear Spread was the most negative that it has been at since Mr. Trump was elected. The spread has been negative for five of the last six weeks:
Many pundits have made the argument that individual investor sentiment is a contrary indicator. They argue that instead of selling investors should be buying when the Bull-Bear Spread turns negative. However, the historical AAII statistical survey data that I have analyzed does not support this thesis. For example, on July 30, 2015, which was prior to the S&P 500’s significant correction that occurred in August 2015, the spread went to a negative 19.6 from a positive 6.9 on July 23, 2015. Additionally, the change was the widest negative spread that the ratio had been at when compared to the other negative readings that had occurred in the prior 100 weeks. The spread remained negative for five straight weeks and the S&P 500 went from 2108 to as low as 1867during the five week period, a decline of 11%. The same thing happened in January 2016. The ratio went from positive to a negative on January 7, 2016 and remained so for seven consecutive weeks. During the period the S&P 500 went from 1990 to as low as 1810, a decline of 9%.
- The fourth sign is that based on the news that came out over the Easter weekend the economy appears to be weakening. This news decreases the probability that investor sentiment will turn positive anytime soon. When the market was closed on Good Friday the U.S. Government released statistical data covering inflation and retail sales for the month of March. The data was not positive. For the month of March core inflation fell by 0.3% which last happened in 1982. Retail sales also fell 0.2% in March and the previously reported gain for February was revised to a decline of 0.3%. See Bloomberg “Falling Inflation, Retail Sales Bolster Fed’s Go-Slow Approach”, April 14, 2017. Further, the CEO of Ford Motor said in an interview that the “The industry has plateaued at a historically high level”. The 17.6 million autos that were sold in the US in 2016 was an all-time record:
- The fifth sign is that the optimism for President Trump to fulfill all or even a majority of his campaign promises has waned. This is likely the reason why sentiment has turned negative. Last week Trump changed his mind about China being a currency manipulator, decided that NATO is worth keeping intact and that he was considering to re-nominate Janet Yellen as head of the Federal Reserve Bank. See “Trump flips on four policies in one day”, The Hill April 12, 2017.
It was the optimism that Trump had created from his campaign promises which turned investor sentiment from being decisively negative before the election to decisively positive for ten consecutive weeks after the election. In further support of the extremely positive post-election sentiment, it was widely believed that a republican majority in both chambers of the U.S. Congress would make it a slam dunk for President Trump’s initiatives to be passed. This is no longer believed. Donald Trump’s inability to get the health care bill passed to replace Obamacare and the Senate’s having to utilize the nuclear option to get Mr. Gorsuch appointed to the Supreme Court were huge disappointments. The bearish reading has been above 37% for the past three consecutive weeks. The last time that had happened was the first three weeks of January 2016.
- The sixth sign as to why the high for this bull was set on the first day of March 2017 is “history”. According to history half of the stock market’s milestones including its all-time highs and historical bear market lows have occurred during the months of March and October. See “Closing Milestones of the S&P 500”. Since 2000 all major tops and bottoms for the S&P 500 occurred in either March or October. The current bull was born when the market bottomed in March 2009. The dotcom bubble peak for the S&P 500 occurred in March of 2000. October 2002 was the month that the market bottomed after the dotcom bubble’s bursting. October 2007 was the market’s peak before the 2008 crash.
Without a sustainable reversal in sentiment it will be very difficult for the S&P 500 to eclipse its March 1, 2017 all-time high of 2395.96. The table and chart below is a good example of why. They depict that the reversal in sentiment from negative to positive on July 7, 2016, after the Brexit vote resulted in the S&P 500 powering consistently to new all-time highs starting on July 11th and ending on August 15th. The longer that it takes the sentiment to reverse decisively the less likely that the S&P will make a new high in 2017. With each passing day that the S&P does not go to a new all-time high it will be all the more difficult for the index to reach a new high. The S&P 500’s all-time high that was eclipsed on July 11, 2016, occurred on May 21, 2015. By the way, prior to that high the Bull-Bear Spread had been positive for the previous consecutive eight weeks.
Since the S&P 500 is within 2% of its all-time high investors should give serious consideration to liquidating their holdings in the market prior to a crash or correction happening. The video below entitled “Crash! & 90/10 Crash Protection Strategy” is about the only safe solution that one can utilize to protect their liquid assets against crashes, corrections and recessions.
Finally, I am predicting that the decade ending 2020 will be recorded by historians as having been the best ever for investors to build dynastic wealth of 10- to 100-times investment from a diversified portfolio of privately held digital companies. I recommend that you watch the video below entitled “Decade ending 2020, best ever for creating instant dynasty wealth”. It was produced by Dynasty Wealth LLC, an investing community that I founded. Dynasty Wealth specializes in finding primarily digital companies for investors that have 100X upside potential.
Additional videos about producing dynastic wealth are available at http://www.dynastywealth.com/video.php. In-depth information about both my past and current predictions is available at www.michaelmarkowski.net.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of www.equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer
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