Based on a unique comparison with the Nikkei 225 and prior mega-bears
it seems evident that the S&P 500 should continue its rise to 1400 or so
in the first half of 2011 before it collapses completely down to an
unbelievably low of 400. Before you totally reject this possibility please
read the entire article.
Bank of America Merrill Lynch Asia's Comparison With Nikkei 225
Market strategists Sadiq Currimbhoy, Arik Reiss, and Jacky Tang of Bank of
America Merrill Lynch Asia identified a pattern back in 2009 that supports
the likelihood of additional gains in the S&P 500 regardless of the
extent of the extent of the economic recovery in the U.S.. The analysts
plotted the S&P 500 in DXY terms against the Nikkei by rebasing the
S&P 500 to the same peak as the Nikkei but lagged by 117 months (i.e.
9.75 years) and uncovered an uncanny relationship as shown in the chart
below.
Their analysis suggested that the S&P peak would be achieved by
December 10th of last year but that obviously was not the case. Failing to
achieve such a precise projection can be excused so the realization of such a
target in the first half of 2011 should be deemed acceptable.
Doug Short's Comparison With Previous Mega-Bears
Doug Short provides an on-going inflation-adjusted overlay analysis (see here
and here)
at dshort.com of the Dow crash of 1929 and the Nikkei 225 crash from its 1989
bubble high against the current S&P 500 as seen below. It clearly
suggests, even without the 9.75 year time-lag as put forth by the Merrill
Lynch analysts above, that the S&P 500 is due for a significant
correction.
Merrill Lynch's Historical and Current Peak-Trough Index Comparison
The Merrill Lynch strategists went further, constructing an
equally-weighted index of all markets that have crashed more than 45% since
1970 plus the U.S. stock market crash in 1930 and then averaged the
recoveries from these crashes (referred to as 'Historical Peak-Trough
Index'). This is shown in the chart below with 25% and 75% bands.
When the Historical Peak-Trough Index was compared to markets that have
recently experienced similar deterioration (referred to as 'Current
Peak-Trough Index') they concluded that the current S&P 500 index looks
like it's following a similar pattern that would have the S&P 500 topping
out at somewhere around 1400-1500 (i.e. 5-10% less than the S&P 500's
record high of 1565 in October 2007) before crashing back to its 1994 low of
400 (when the stock market bubble first began) by the end of 2013 or early
2014.
The Merrill Lynch Asia strategists maintained that the rally in the
S&P 500 would likely be triggered by central bankers keeping interest
rates low (which they have), by an economic recovery (which is slowly
underway) and/or by an undervalued U.S. dollar (which has turned out to be the
case).
Conclusion
The analysis by Merrill Lynch Asia and the current charting by Mr. Short
bear scrutiny and ongoing review if we are to successfully navigate these
troubled economic/financial/investment waters.
