Menu

Sunday, May 25, 2014

S&P 500 MINI-MANIA HITS. 24% CORRECTION OR 42% CRASH UPCOMING?

On Friday, reporters of news media everywhere reported on the S&P 500 closing at a supposed record high on Friday, May 23, 2014. Is it true though? Did the S&P 500 close at an all-time high?



Let's have a look at the True S&P 500 after removing the effects of cash accretion.




True S&P 500 hit a high way back at the end of Q1 2000 when the S&P 500 traded at almost twice the price as it does today.

Friday's close is nearer to the end of Q4 1996.

Here is what the True Dow Jones Industrial Average looks like compared with the True S&P 500.



Now, let's look at the True S&P 500 to True GDP.



In general, the chart shows the players in stocks that constitute the S&P 500 trade fundamentals, sometimes lagging the economy and sometimes leading the economy.

A true speculative mania set in sometime between the end of Q1 1997 and the end of Q2 1997. That mania held and went higher from Q3 1998 until the peak at the end of Q1 2000.

As I recall, during the years of 1999 and 2000, the bus boys and bartenders at the local NFL Sunday sports bar chattered about stocks and what they should buy next. 

After a violent crash, from the end of Q3 2002 until the end of Q1 2013, players of the S&P 500 resumed trading on beliefs close to fundamentals.

If the S&P were trading at the long-run average of true GDP to True S&P 500 ($15.65), the current price of the S&P 500 should be closer to $1,095.65. That would be a whopping crash of 42.35% from Friday's peak.

If the S&P were trading at the of true GDP to True S&P 500 from Q3 2002 low through Q3 2011 ($11.86), then the current price of the S&P 500 should be closer to $1,445.96. That means the S&P would need to fall 23.92%.

$1,445.96 sounds about right to me.