Alan's Finance Blog

The Fastest Doubling of the S&P 500 Since the Great Depression!

Since its low in March 2009 the S&P 500 Index has doubled. Last week The Wall Street Journal stated that it was the fastest doubling since 1936. That rally began in March 1935 and reached the 100 percent gain mark in 501 days. The red vertical line in the chart below depicts the start of the rally.

This time the market needed a bit longer to double … 707 days.

What the Journal did not mention was what happened afterwards. Let’s fill that gap, since the rest of this story is as interesting as the first part …

Immediately after the index doubled in 1936 a short-term correction followed. But then the rally reassured itself. It lasted another seven months and gained 15 percent. However, that was the end of the party as you can see in top panel of the chart.

The S&P 500 experienced 40 percent slump the following year. But the final low of this bear market came as late as 1942. Many analysts conclude that 1942 marked the real end of the Great Depression.

An Interesting Analogy

I see an interesting analogy here since the bull market of 1936-1937 followed the most severe financial crisis in U.S. history, and the current rally follows the second-most severe one.

In 1936 hopes ran high that the crisis was over and a sustainable recovery had started. But as it turned out the economic slump was only interrupted. Another grave economic downturn started in May 1937 and lasted until June 1938 with GDP declining 3.4 percent. Only the outbreak of WWII put an end to the Great Depression.

As in 1936 hopes are again running high that the Great Recession and the associated crisis is over and that a sustainable rally has started. This may also turn out to be a false hope. Why?

Well, the underlying problems of overindebtedness have not been solved — not even addressed. Quite to the contrary. All that has happened is the government stepping in and shifting some of the most pressing debt loads of financial institutions from the private sector to the public sector.

That’s not a solution; it’s kicking the can down the road!

Fundamental Valuations Are High

Now look at the middle and bottom panels of the above chart. The middle one shows the price/earnings ratio, the second one dividend yields. Both are time honored measures of valuation. First you can easily see that current valuations are very high.

Then compare 1937 to today. In 1937 the price earnings ratio was a tad lower than now. But the dividend yield was higher at 3 percent then vs. 1.7 percent today. Obviously, the stock market is no healthier now than it was in 1937.

Let’s summarize the main points: In the mid-1930s the stock market and the economy were recovering from a major crisis, and the stock market was clearly overvalued. The majority of market participants and economists were sure a sustainable recovery had just begun.

Their hopes were quickly dashed.

Will it be different this time around? Probably not because we’re in the same boat today: Recovering from a major crisis, an overvalued stock market and high expectations.

Plus there are other signs warning of a high risk environment …

Fund Managers Fully Invested,
Short Interest Drops;
Insiders Selling Stock!

First, mutual fund managers are again fully invested with an average cash quote of a mere 3.5 percent. This is the lowest reading since this data series began in 1988. Only once before — in March/April 2010, just before a 20 percent correction — has this indicator been so low. Even at the major highs of March 2000 and October 2007 fund managers were more cautious than now.

Second, the NYSE Short Interest Ratio has fallen from 4.1 in December to a very low 2.6. This ratio measures the total outstanding shares sold short divided by the average daily volume for the last month. Its interpretation is twofold …

A low short interest ratio is a sign of widespread bullishness or at least complacency. Even more important is the fact that short sellers are potential buyers in case of a market slump. To realize their gains they have to buy back the shares sold short. So the massive decline in shares sold short means there will be fewer buyers in the future.

Third, financial insiders are massively selling the stocks of their companies. Alan Newman of Crosscurrents shows that 68 sellers were matched by just four buyers. And the ratio of shares sold to shares bought was 855.

So why are the insiders of Goldman Sachs, Wells Fargo, JPMorgan, Morgan Stanley, American Express, Citigroup, and US Bancorp selling like mad? They apparently have some doubts in the health of the current rally — at least insofar their own money is concerned.

You don’t have to sit on the sidelines if the market takes the header I see coming …

One way to profit from a declining market is with an inverse ETF, like ProShares Short S&P500 (SH). This fund seeks daily investment results that correspond to the inverse of the daily performance of the S&P 500 Index. That means you stand to make 1 percent for every 1 percent the Index drops.

Want another pointer?

Get a copy of my new book, The Global Debt Trap. You’ll learn more critical background information about asset bubbles, money printing, opportunistic central bankers, and government debt and what this all means for your financial health.

Best wishes,

Claus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Why weekly charts work

Many traders get so involved with the market on a daily or even an intraday basis, that they somehow lose out on the bigger picture. Weekly charts are enormously helpful in giving clues to the future direction of the market.

In today’s video we examine one of the biggest markets in the world, the S&P 500, using a weekly chart. The video runs about two minutes in length and I think you will find it both educational and informative.

As always our videos are free to watch and there are no registration requirements.

Enjoy the video and be sure to share your thoughts.

http://www.ino.com/info/620/CD3336/&dp=0&l=0&campaignid=3

All the best,
Adam Hewison
President of INO.com
Co-founder of MarketClub

Where should YOU be in the S&P 500?

Hello this is Adam Hewison and I’ve just returned from my daughter’s wedding in New Zealand to see that we have some very interesting markets to start the New Year.

In today’s short video we take a fresh look the S&P 500 and what we think it is going to do in 2010. We will also be looking at an important “Trade Triangle” that has just flashed an important signal for this index.

http://www.ino.com/info/507/CD3336/&dp=0&l=0&campaignid=3

As always our videos are educational, free to watch, and there’s no need to register. Enjoy the video and please feel free to leave your comments on our blog.

http://www.ino.com/info/507/CD3336/&dp=0&l=0&campaignid=3

All the best to you in 2010,

Adam Hewison
President, INO.com
Co-creator, MarketClub

Key Levels to Watch in the S&P 500

Well here we are in the month of December and things can get pretty tricky this month. For this reason, I wanted to produce a video that I thought would be helpful to you during this time.

In my new video I show you the exact points that we’re looking at for a major trend change in the S&P 500. I also point out the exact number that will show an exit point, but not a major trend change, in this same index.

http://www.ino.com/info/489/CD3336/&dp=0&l=0&campaignid=3

As always our videos are free to watch and there is no need to register and we look forward to your comments.

Adam Hewison
President, INO.com
Co-creator, MarketClub