S&P500 Cycles Suggest Caution

April 8, 2015

The S&P500 Index has been levitated for 6 years by easy money, low interest rates, buy backs of corporate stock, and so much more.

Can it rally for another 6 years?

I doubt it.  

Examine the following log scale monthly chart of the S&P.

Items to note:

  • Vertical blue lines show lows – about every 8.75 years.
  • Vertical red lines show tops – about every 7.5 years.
  • The “danger zone” is the area of the red upward trending support line. When the S&P has reached a long-term top area (vertical red line) and has fallen below the red support line, look out below.
  • We are close to a danger zone (approximately 2000 – 2050) as of the end of March 2015.

Does this mean a stock market crash is coming?  Certainly not!  The financial powers-that-be might prolong this rally several more months or even several years, although my take is that an extension into 2016 is unlikely.  However, easy money, bond monetization, zero interest rates, negative bond yields in Europe, and fear of a deflationary collapse can work wonders to support over-extended markets, so we can’t rule out even higher prices.

But given that the S&P has rallied since early 2009, experienced only a minor correction in 2011, is currently at a cyclic peak, clearly over-bought on a monthly and weekly basis, and has been artificially sustained by central bank easy money, is it likely that the next MAJOR move is up or down?  My bet is down. 

I hear your objection.  Can we trust cycles?  In my opinion they are useful but not absolute.  However, long-term cycles are more trustworthy than short term cycles.  Use them in conjunction with other confirmation.

But considering that silver is off about 2/3 from its high nearly 4 years ago and the S&P500 has been rallying for 6 years, I find silver a far more compelling investment than the S&P500.


Gary Christenson

The Deviant Investor

During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.

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