When has the greedometer identified a secular stock market top ?
- September 9 2011 update: in mid-August, the greedometer registered a confirmation reading the April – May 2011 highs (nearly re-tested in July) were the top of the US stock market for several years to come, and that a major stock market crash was in our path in 2011-2012.
- January 2012 update. The latest intrusion by the Fed (Operation Twist), and the ECB’s LTRO program truncated the 2011 stock market collapse. Yet another pause button. The greedometer will build up to redline levels again in 1Q and 2Q 2012. Another collapse awaits.
Previous greedometer redline points in time:
The 2000 -2002 crash.
The greedometer sm hit 7500 rpm in late December 1999 and started the clock ticking for a stock market crash. Granted, an element of the high risk readings could have been attributed to Y2K concerns.
Stock markets were very volatile throughout year 2000. This was the final year in an 18-year nearly uni-directional stock market ride. The greedometer redlined at 7500rpm in March, then remained over 6000rpm until redlining at 7200 rpm in late August. This was the last redline in the greedometer sequence. In early December, the greedometer provided a confirmation reading that the top was in and that a crash lay in front of us. From the final redline reading, the S&P500 lost 47% in the ensuing crash.
It took a massive federal gov’t commitment to spend beyond its means (grow the debt pile we now have) to stop the stock market from dropping further — to where it ultimately will have to go. A previously unheard of amount of federal overspending and a 1% Fed Funds rate (not seen since 1958) eventually stopped the collapse. But as we know, this did not solve the problem. Instead, it made the problem bigger. Actions taken by Congress & the Fed added to our debt, caused a stock & property bubble, and kicked the can down the road for an even larger future implosion.
(for the charts below…) The dotted horizontal red line marks the lower limit of the redline zone (7000 rpm). There have been no false alarms. Every time the greedometer smregistered 7000 rpm or higher, a major stock market crash followed. Equally helpful, no major stock market crashes occurred without the greedometer redlining (since 1999).
The 2007 -2009 crash.
The greedometer smwas not heard from again (in terms of stock market top warnings) until it redlined in February 2007 (nearly 7200rpm). The greedometer hit 7700 rpm in July 2007, remained in the 6000s, then rose back up over redline to 7200rpm in October. In November, the greedometer provided a confirmation reading that the market top was in and a crash was in front of us. The S&P500 dropped 57% from October 2007 through March 2009 and would have continued lower if it weren’t for QE1, bank bailouts, the AIG bailout, car company bailouts, and even more obscene levels of government overspending. Yet again, the fundamental flaws in the economy were not addressed. The cost of stemming the stock market collapse was several $T added to our debt. The problem (debt) was made worse and the proverbial can was kicked down the road once again for someone else to solve.
The 2011 crash.
The next time the greedometer sm saw redline was April 2011. At 7800rpm, this was the highest reading ever. Readings remained mostly over 6000 rpm throughout 2011 until August. That’s when readings fell and a confirmation reading was provided i.e., stock market crash impending. But the Fed announced Operation Twist in September, and the ECB stepped in with LTRO in December. This effectively stopped the 2011 greedometer sequence.
The 2012 – 2013 crash.
Early 2012 sees the greedometer sm repeating the early 2011 and early 2010 action. It is climbing as systemic risk mounts. Redlining (7000rpm+) is likely to recur in April and May as the S&P500 surpasses the April 2011 highs (but not by much). A sub-1% first read by the BEA on 1Q 2012 GDP (in late April) is likely to take some wind out of the sails of risk assets. Then we’ll see another round of greedometer redlining as July earnings season sees similar stock market highs to April. The mini greedometer will be key in identifying the initiation of the main 2012 – 2013 greedometer sequence (but that won’t be posted on the website. clients only.) This point will confirm the secular top of the S&P500 and initiate another slide similar in proportion to the 2007 -2009 slide, if not slightly larger. Buckle up.
NAPFA