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When has the greedometer identified a secular stock market bottom?

 

The greedometer _sm is based on data going back to January 1999.  Despite the hair-raising March 2009 low, it was not the secular bottom for the US stock market. We will likely witness the US stock market (& other equity markets) fall through the March 2009 low during another market collapse in 2012 – 2013.

The greedometer _sm can teach us something about how the stock market behaved at the lows in late 2008-early 2009. It dropped under 1000rpm in the 3rd week of November 2008.  By that point, most of the stock market drop had been realized, and we were searching for a bottom. The S&P500 rose 10% in the following 2 months as QE1 ramped up, then fell back through the November low a further 11% to the bottom in March 2009.  Again, it took never before seen fiscal and monetary stimulus to stop the collapse. Without that largesse, the stock market would have plumbed lower depths, and the greedometer _sm would have registered even lower readings. With this in mind, once we reach the point where:

• no more fiscal stimulus may be added (we’re now there),
• and the Fed realizes it is pushing on a string with any further expanding of its balance sheet (be it QE3 or other gimmicks),

then it is likely the ultimate secular stock market bottom will see the greedometer _sm approach zero.  At the March 2009 low, the greedometer _sm dropped to a reading of virtually zero rpm – the lowest reading ever.  Let’s make use of an engine reference again here. Just as very high rpm readings suggest an engine is about to self-destruct, very low rpm readings warn an engine is about to stop.  And so it is that greedometer _sm readings approaching zero rpm signify a secular stock market bottom.  Once the greedometer drops under 1000rpm (a very rare event) the data suggests a secular stock market bottom is approaching.

We can also learn from the greedometer _sm during the 2000 – 2002 bear market. That market bottom saw the greedometer _sm drop to the 2800rpm range in November 2002. The stock market would have dropped far lower had  Congress and the Fed not taken the risky and myopic, steps they took.

The 3000 rpm range is a key support level for future reference.  In the 2000 -2002, 2007 – 2009,  and 2011 greedometer sequences, when readings approached 3000rpm (on the way down), the Fed began pulling out all the stops to keep the economy afloat.  This rpm range will likely be a good launch point for future bear market rallies — so long as the Fed can find another rabbit to pull out of the hat (that won’t always be true). Predicting the size and duration of bear market rallies is impossible. With that said, the extent of the rally will almost certainly be correlated with the ability of Congress and the Fed to implement new stimulative tricks.

Ultimately the secular stock market bottom we face in 2012-2013 will likely be to lower levels than the March 2009 lows (S&P500 dropped to 666, Dow dropped to  6400s), and see the greedometer _sm drop to zero.  The Dow with a 5-handle (in the 5000s) would be a reasonable expectation for a secular stock market bottom. Probably in 2013.