John Hussman does the best long-term statistical analysis of the broad equity market, bar none. He has identified a set of four conditions that has appeared at or just before significant tops in the stock market:
Overbought: S&P 500 within 3% of its upper Bollinger bands, at least 7% above its 52-week smoothing, and over 50% above its 4-year low
Overbullish: Investors Intelligence sentiment survey shows bulls above 52% and bears below 27%
Overvalued: Shiller P/E above 18 (it’s currently 23)
Rising yields: 10-year Treasury yields above their level of 6-months earlier.
This condition also appeared in 1929 (followed by a crash and 20 year bear market in real terms) and 1964 (stocks peaked in ’66 before going down 80% in real terms over the next 16 years). When stocks are overbought and overvalued, treasuries have fallen, and most investors are bullish, it is to your great advantage to eliminate market risk (sell your stocks or hedge them).
Chart from Doug Short, Advisor Perspectives:
Platinum has had a sharp rally in recent sessions, while gold has been only slightly higher, bringing the two heavier precious metals (specific gravity of 19.30 for Au and 21.45 for Pt) to parity for the first time since April. The ratio remains high, and has been elevated since gold left the more-industrial platinum in the dust in the summer of 2011:
This has been one of the longer periods of inversion in recent history. Selling gold and buying platinum in equal weights when the ratio is well over 1.0 has been a dependable money-maker for patient traders, as the ratio tends to revert to well under 1.0.
This has been an extremely dramatic decline, from 22 to 13.9 in one trading week.
Previous drops under 14 in recent years have been followed by limited upside in stocks and an increased incidence of significant declines.
This week’s action seems to be based on relief that Congress has come to terms on the budget. Never mind that taxes are going up for everyone (payroll tax “holiday” ends), and that no progress was made on spending, not even so-called “cuts” to the rate of growth.
Side note on the budget:
High inflation remains baked into the cake for the coming years, just as it appeared in the later years of the secular bear markets of the 1910s, 1930s-40s, and 1966-1982. This is not just because the government is running trillion+ deficits without end, because the Fed has tripled its balance sheet and the monetary base in just four years.
When enough bad debt has been written off for lending to start back up in earnest, the upswing of the multi-generational interest rate cycle will have severe repurcussions for the budget. The effects will be greater because the US Treasury is not taking advantage of low long-term rates, but issuing mostly shorter-term notes.
Note that I was a rare bull on Treasuries going into the last debt crisis. That is no longer the case, but I’m not necessarily bearish on them just yet.