When the Stock Market Bubble will Burst

U.S. markets were closed yesterday in observance of Memorial Day.  But, nonetheless, we peered through our Economic Prism for hints and clues of what’s to come.  There are no bones about it.  We believe the bull market’s end is nigh.  And if it isn’t, it should be.

We’ve detailed various rationales…like stock valuations and average bull market durations.  We’ve made countless observations of the rough waters the economy is sailing into.  Corporate earnings are doomed.

Still, day after day, stocks continue to rise.  Higher, further, longer than we possibly could have imagined.  We can hardly believe our eyes.

Could we live in a world with only upside and no downside?  Could risk be no more?  Not unless you believe the impossible.

For with each passing day that the bull market marches on, we know it is one day closer to its end.  Moreover, the higher stocks go the harder their landing will ultimately be.  Here’s more evidence the bull market’s days are numbered…

Margin Debt Drops

“Risk taking in the stock market is showing signs of cooling,” noted Steve Russolillo in the Wall Street Journal.

“The latest example comes from the New York Stock Exchange’s April figures on margin debt, or the amount that investors borrowed against their brokerage accounts.  NYSE reported margin debt dropped for a second straight month, falling to $437.2 billion.  That’s down 6.1 percent from a record high $465.7 billion in February and the lowest level since November.

“The last two times margin debt peaked–2000 and 2007–coincided with major tops in the stock market.”  If you don’t recall, the subsequent market declines were quite remarkable…

After peaking at 1,527 on March 27, 2000, the S&P 500 slid down a steep slope, bottoming out on October 9, 2002, for a total decline of 49 percent.  Yet that was just the warm up.  Several years later, after running up to a new high, the S&P 500 folded again.

On October 9, 2007, the S&P 500 stood at 1,565.  By March 9, 2009, the S&P 500 had crashed to 677…a total fall of 57 percent.  Since then, over 5-years, the S&P 500 has gone up without interruption, eclipsing 1,900.  What to make of it?

When the Stock Market Bubble will Burst

Perhaps the S&P 500 could run up even higher.  Fund manager and market forecaster Jeremy Grantham thinks so…

In his latest quarterly letter, Grantham included several “best guess for the next two years.”  In fact, Grantham believe the bull market “probably will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500.”  But after that, watch out…

“Around the election [2016 presidential election] or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up.”

Make of it what you will.  But remember, Grantham has a track record of accurately calling market tops to back up his forecasts.  For this reason it is a good idea to at least consider his prognostications.

Here at the Economic Prism we are pragmatic to the extreme.  More than wanting to make money we want to prevent losing it.  Most of all we want to prevent ruinous losses…the kind of losses that set a retirement plan back a decade or more.  What we mean is, based on the current S&P 500 of 1,900 and Grantham’s estimated top of 2,250, we see an 18 percent potential upside against a 50 percent downside.

Without question, now is not the time to be loading up on stocks.  With the exception of your most conservative holdings, it’s time to be stockpiling cash for the next buying opportunity.  Almost certainly, patience will be unduly rewarded.


MN Gordon
for Economic Prism

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