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Boom/Gloom Index suggests S&P 500 close to its peak

Financial Events
By Paul Hodges on 07-Nov-2014

Index Nov14

JugglerHow long can the juggler keep all the balls in the air?

That is the question that compels us to stand in the square and watch her skill at work.

We have the same fascination watching central bankers at work – they similarly aim to keep financial markets aloft, to create their desired ‘wealth effect’.

But we know that the juggler can’t keep the balls in the air forever.  Sooner or later, she will catch them, take a bow, and go round with the collection box.

And we know the central banks can’t keep on pushing stock prices higher forever.  This is likely why Janet Yellen, US Federal Reserve Bank chair, took a bow last week and ended the Fed’s purchases of US government debt.

She knows, as we know, that there has to come a moment when gravity kicks in and prices return to earth.  And as the chart shows, the Boom/Gloom Index is signalling that moment is fast approaching:

  • The US S&P 500 Index has just hit a new record close last night at 2031 (red line)
  • But the Boom/Gloom Index has moved very close to a downturn reading at just 4.3 (blue column)
  • And its decline is not just a one-month panic – its peak was back in June/July

CAPE Nov14

The second chart confirms the Index’s concern.  It comes from noted analyst Doug Short and measures the US market’s position today in terms of Nobel Prize winner Robert Shilller’s 10-year CAPE Index.

  • The 10-year CAPE Index began in January 1881
  • It is currently in the 91st percentile of all readings since then – and very near an all-time high
  • Only 2000’s “dotcom bubble” (orange); 1929’s market peak (green); and 2007’s peak (pink) have been higher

Of course, those who are confident of picking the top may well choose to keep their balls in the air a little longer.

But I suspect the Boom/Gloom Index will be proven right in due course.  Unless history is about to be rewritten, we must be very close to the S&P 500’s peak.