Hearing a lot about how over-bought US equities are lately.

Much of the clamor is related to the relentless sprint higher since 11/8/16 and the election of Trump.

However, if one can accept the assumption that the cycle underway is akin to the other “mid-cycle pauses” we have discussed, updated just last week in this analog, the SPX, currently printing just shy of ~2,400, hardly seems over-bought in the context of history.


Because at ~2,400 the index is a mere 19% above its trailing 48 month MA (as explained before, the 48 month MA is the “average” cycle length across history using YoYs to define cycles).

By contrast, the blow-off tops that came in 1929, 1956 and 2000, or out of the 1926-1927, 1953-1954 and 1994-1995 “mid-cycle pauses”, printed their peak prices 76%, 52% and 56%*, respectively, above their own 48 month MAs (*this level came in 1999; price was only 40% above the 48 month MA at the actual top in 2000 even though the SPX had added another ~10% (and NDX stocks much more) vs. 1999).

One can see this visually on the chart below:

Right now the trailing 48 month MA on the SPX is ~1,965.  If we hold price constant through YE2017, that # becomes ~2,100 at that time.  If we apply 1956’s peak that saw price exceed the trailing 48 month MA by 52%, the weakest among the three cycles, this alone suggests the SPX should reach ~3,200 sometime during 2018.

However, because price is unlikely to stay constant through YE2017, the latter is likely an erroneous conclusion.

Remember that any additional SPX gains through 2017 or during 2018 will pull the trailing 48 month MA higher vs. our assumption of flat prices and, as the 2000 top showed, actual peaks in prices can come after and at higher levels vs. the peak print in the % deviation of price vs. the 48 month MA (and though not previously mentioned, the 1998 top, one I have argued should have been the end of the cycle were it not for Fed intervention, came with price +62% vs. the 48 month MA).

Thus, as noted earlier, if our assumption about a mid-cycle pause cycle is correct, at +19% vs. the 48 month MA, the SPX is hardly over-bought and instead, is likely on it way to eclipse 3,000 as we round 2018, with the potential for more thereafter.

Two questions remain about how much:

  1. Do markets truly take illogical policies to their logical extreme?
  2. How illogical have our policy makers and their chosen policies been in this cycle vs. their predecessors throughout history?