S&P 500 Dividend Yield > 10 Year Treasury

Courtesy of Bloomberg, dividend yields on U.S. stocks have surpassed yields on 10 year government treasury bonds for the first time since the 1950s. This has traditionally been a bullish signal; of course, this is not your traditional market!

The Most Volatile Market...Ever

Over the last 50 trading days, the average absolute daily percentage change of the S&P 500 has been...wait for it...3.82%! That means the S&P 500 is averaging a daily move of up or down nearly 4%. This is definitely one of the craziest statistics of the current bear market, and unfortunately, the majority of the daily moves have been down. In the history of the S&P 500, there has never been a more volatile period. Back in February of last year, the 50-day average absolute change was just 0.33%. When we ever do get back to daily moves of less than 1%, traders are going to be falling asleep at their desks after going through this turmoil.

Investor Allocations at Historical Lows

The present reading puts us 15 % under the 21-year historical mean. This reading is significant because it mirrors the readings seen at other major lows such as 1987, 1990 and 2002. Now while it doesn’t mean we bottom tomorrow (though we could) it does mean stocks are certainly closer to the end of the decline rather than the begininning.

Liquidity plays a major role in the future direction of stocks because it gauges available — as well as future — buying power. When investor allocations to equities are very low this is bullish for stocks as it suggests investors (not cash) have moved to the sidelines in droves.

This does two things: Low equity allocations suggest investors have sold in droves, thus reducing much of the selling pressure from the market; Second, the low equity allocations suggests a large buildup in sideline cash (ie. new buying power) from many individuals.

Round Trip

The S&P 500 has now erased 100% of the gains generated by the bull market from 2002 to 2007. In fact, the S&P 500 has made no progress over the past 10 years, as current levels are the same as those seen in 1998.

Stock Market Roller Coaster

Looking for a less stressful job? :)

U.S. Debt Ratio

US debt levels as a percentage of GDP are at all time highs...perhaps the deleveraging consumers, businesses and the economy (save for the government, which is going in the opposite direction) are currently going through may reverse the spiraling debt cycle we have been in.

When Will This Ride End?

Interesting graph showing daily returns on the Dow since late 1928 (blue) along with bands two standard deviations around zero (1-year lookback).

Current volatility is at levels only seen a few times in market’s history: the late 1920’s, various points in the 1930’s, and 1987.

Notice how sustained volatility was in 1920’s and 30’s. We went years and years experiencing the kind of gut wrenching gyrations we’re seeing now. I know it’s dangerous to compare this market to that one, but if we allow history to be our guide here, this ride could be a long way from being over.

Market Emotions - Where are we Now?

There have been quite a few anecdotal instances of individual investors ready to sell out entire stock portfolios out of panic. In many cases, these portfolios may contain companies selling at good prices, in some cases, outstanding values. There are a lot of companies in this market that are now good value. Yet, for every argument presented to suggest potentially that now may not be the best time to sell, panicked investors may offer an even more impassioned counter argument as to why stocks were still miles away from any type of major low. It is a funny thing, but markets in particular always work this way following a kind of perverse cycle that feeds on human emotions.

In the cycle of market emotions, ‘Denial’ gives way to ‘Fear’ and then eventually, “Panic”, “Capitulation”, and a “Depression.” In talking to many people, I hear a lot of those latter three emotions right now, and it is interesting because the market is not making new lows. Over the last four weeks, stocks have been in a trading range, yet the feeling I get from most people is more negative now than it was back in mid October.

Mind you, none of this means that the markets are necessarily near a final low, or that the downside risks in the economy will not persist and even get worse. Yet, within powerful trends, even Great Depression sized trends, there are periods of pause, periods of downside excess, and periods where psychology is given to mean revert. Accordingly, there is a chance that markets will base out and then recover. For now, it is all too soon to tell. For the time being, the best place for the average investor is to move the mental mindset back to the middle ground. It is time to, at least temporarily, step back from the ultra bearish camp, and time to give the markets a chance and see how things develop.

Oil Breaks Below $60

With oil breaking below the $60 barrier, the commodity is getting close to its long-term uptrend line which started back in late 2001. With the speed and forcefulness of the declines in oil over the last couple of months, however, it shouldn't be long before this uptrend is at least tested.

Market Cycles

The chart above identifies five major trends which have occurred over the last 80years. First is the 1929-1932 Bear Market, which, although it was short, saw the market decline 90%. Next was a bull market which lasted from 1932 to 1966, which overlaps with the consolidation of the 1960s an 1970s. In the early 1980s another bull market began which peaked in 2000. Finally, we seem to have entered another consolidation phase...it could finish tomorrow, or it could last another 10 years.

Since last week the stock market has made a little progress toward putting in a bottom. Unfortunately, volume associated with this move has been tepid, and there has not been any follow through. This may indicate the advance was primarily being driven by short covering, and that investors are still fearful and on the sidelines. Maybe a bottom is forming, but it is difficult to assert that with much confidence.