Skyrockets in Flight

Skyrockets in Flight

by Zach Marsh on Feb 14, 2020

To say that the stock market has been on a tear lately would be a bit of an understatement.  Since October 1st of last year the S&P 500 is up over 14% and the Nasdaq 100 index is up an impressive 24%!  Additionally, in the past 90 days, the Nasdaq 100 index has finished higher 60 of those days.  The 67% win streak for the tech index is far higher than the nearly coin flip average of 54% going back to 1985.  The current rally is bringing back to many minds the market of the late 90’s when all you seemingly had to do was throw money in the market and you’d make a fortune.  Since many of us have seen this movie before, the question we have to ask is how long can it last and will it end the same way?

By nearly all basic forms of measurement the current market appears to be richly valued.  The Shiller PE Ratio (a 10 year moving average of earnings vs current prices) is at levels only eclipsed by the 90’s tech bubble.  The S&P 500 price to sales ratio is at the highest level on record.  And the price to book value of the S&P 500 index is the highest since the exuberant days of the tech boom.  

From a technical level the market also appears to be overbought.  The S&P 500 is 11.3% above its 200 day moving average and 28% above its 200 week moving average.  The S&P index last touched the 200 week moving average Christmas Eve of 2018, and this measurement has been a decent source of support for the market since the recovery began a decade ago.  As you can see below, when the market has approached the 200 week moving average it has typically been a good buying opportunity.       

      

Courtesy of Yahoo Finance

So if we think of the market’s current price level relative to the moving average, we can make a certain assessment of the stock market’s relative value.  By this measurement, we can say that stocks, in general, are a bit rich.

But do rich valuations mean stocks can’t continue to rise?  By comparison, in July 1998 the S&P had risen nearly 425% from the October 1987 lows.  Valuations, using the same measurements we applied earlier, were equally richly valued.  However, the S&P index still had another 30% higher to climb before it peaked in 2000. 

Today the S&P 500 is up roughly 425% from the March 2009 lows.  Each day the blue chip index shows no signs of ceasing its relentless rally.  In the face of coronavirus fears and potential political instability, the market has shrugged and resumed rising.  But that is what generates bubble-like price levels, perpetual positive reinforcement.  Buying today, watching it go up and repeating the process the next day.  Eventually we lose touch with the fact that the market may not go up forever, leading us to assume greater and greater risk while viewing the risk as non-existent. 

It is a great talent to determine where we are actually at in stages of greed.  But the more you hear people talking about the market on the street, in the stores, on the TV news, or at dinner parties the closer we are to a top. 

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