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Weekend Stock Market Analysis

(5/4/13)

Although the nominal S&P (blue line) has made new all times if you adjust for Inflation (red line) it's  still 20% off its 2000 peak.  The last time we saw this big of a divergence between the nominal S&P and the Inflation Adjusted S&P was back in the early 1970's.   Back then the nominal S&P made a new all time high in late 1972 (point A) while the Inflation Adjusted S&P did not (point B).   

Meanwhile Robert Shiller wrote a paper about historical Inflation Adjusted Price to Earning Ratios (PE) involving the S&P Composite going back to the early 1880's.  What he found was that major Bear Market Lows occurred when the Inflation Adjusted PE Ratio dropped to a value of 8 or less.  These events occurred in the early 1980's, early 1930's and in the early 1920's (points C).

Back in 2009 the Shiller's PE Ratio dropped back to around 13 (point D) which was still quite a bit above values associated with previous major Bear Market Lows.  Currently Shiller's PE Ratio has risen back above 23.  Thus the question is did a major Bear Market Low occur in 2009 and will Shiller's PE Ratio be wrong this time?         

So far the action in Shiller's PE Ratio since 2000 is similar to what occurred from the mid 1960's through the early 1970's and way back in the early 1900's.  In these previous two events Shiller's PE Ratio made a series of lower Lows before bottoming below the 8 level.  If this pattern is repeated then the latest bounce in the PE Ratio will be followed by a lower Low.

Finally also notice the nice long term upward channel.  Will the bottom of the upward channel connecting the 1932 and 1982 Bear Market Lows be tested at some point in the future.       

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