Market Analysis

The Big Move

move1A big move is coming in the S&P 500 and it will take everyone’s breath away. Simply put: The S&P 500 has traded in a multi-year consolidation range with a high of 2134 and a low of 1810. A breakout or breakdown out of this range could result in a measured technical move of the height of the range, i.e. 2134 – 1810 = 324 handles. Consequently a break toward the upside would target 2458 (15% above all time highs) and conversely a breakdown would target 1486 and represent a 30.4% correction off of all time highs.

I’ve outlined the bear arguments in detail in Feeding the Monster, so I won’t bother rehashing them here. However, in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.

This duality can be summarized in one chart:

SPX GAAP Money supply

Speaking for a breakdown so far is the historical similarity in structure of the monthly RSI and a decrease in GAAP earnings since 2015. Furthermore the $SPX has broken its ascending trend line in 2015 coinciding almost perfectly with the peak in GAAP earnings. These 3 developments are bearish in any historical context.

Note though something curious has happened during the same time: While price has recovered dramatically since February the continued decrease in earnings has made stocks the most expensive in years with a GAAP P/E ratio north of 24.


Another key consideration: M1 money supply has continued to rise and print new record highs, not really deviating from the path it has embarked on ever since the financial crisis.

The reasons are generally well known as the Fed is a key source of influence:

Fed balance sheet

While the Fed has ended QE3 in October 2014 and is supposedly on some sort of rate hike path the evidence shows that its balance sheet has not only not decreased but it has stayed in a range and even made new highs in 2015. Just like the S&P 500. Imagine that:


And this issue highlights the battle for control here and the argument for a break higher:

A: A potential continued increase in M1 money supply which just made a new all time high in April:


B: Should earnings revert higher (against current trend) then the combination of increased money supply & improved earnings would support the notion of an equity move toward the upper measured move target.

And perhaps markets are anticipating this move as evidenced by a sudden breakout in the cumulative advance/decline index:


However, and possibly a warning sign that things are not as well as they suddenly seem: The $NYSE composite index just barely managed to get back to 2007 highs, a somewhat unimpressive result considering that it took over $4.5 trillion in Fed balance sheet expansion and a $10 trillion increase in US debt to get back to the same levels. And note it too, just like the $SPX, broke a key trend line in 2015:

NYSE comp

The bottom line: This is a big battle for control. On the one hand fundamentals and technicals suggest a breakdown of size may well be in the cards, while on the other hand, continued “highly accommodative” central bank policies coupled with perhaps an incremental relative improvement in earnings to come may result in a breakout making stocks even more expensive than they are now, the classic blow-off top scenario if you will. Clarity will only emerge once the range is decisively broken in either direction.

Whoever wins this battle gets the big move. 324 handles.



14 replies »

  1. Thank you Northy. Your ability to bring the big picture into sharp focus is remarkable. The battle raging between the two camps is palpable as the tension between adherents of both views is growing more and more acrimonious. I wonder what will be the factor(s) that will tip the battle one way or another?

  2. I do agree in a possible b/o to the upside (which is very, very odd within the election cycle), but why does it need to be another 100% on the high? I can see and make a case of 50% added on 213x/2140 before breakdown.

  3. You forgot an important thing. The USD bottomed this past week. It was the fear of the USD rising due to Fed rate hike in December that caused the big drop to near 1800.

  4. 4/22/2016 So who are they that are holding up the stock market when it should be pulling back from this very overbought condition. Some at this level calling for new highs and few calling for a pull back. Did I miss something as for the reason of such a move? Or could it perhaps just be political and the Feds have been ordered to hold it up in a election year?. Will the sell in May crowd show up this year or not? Where will you be when the Levee breaks? Have a good week end all.

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