Probability Reigns

a ratio chart, and the M2’s growth didn’t hinder the genuine strength of stocks. The green basing pattern that straddles these first two phases illustrates the clarity, longevity and cleanness of the bullish base that formed and launched stocks into their greatest bull market of the century.

Phase Three: Here we have the reversal pattern that preceded the 2000-2002 bear market.

Phase Four: From 2002 through 2007, the market recovered, but take note of how weak the recovery was when the M2 money supply is taken into account. Although the nominal indexes were making new highs, the truth beneath the surface is that this was a flimsy rally propped up by growth in the money supply, and the facade all came crashing down with the great financial crisis.

Phase Five: Finally there was the steady lift in equities from 2009 to date. What’s remarkable about this phase is that even though stock indexes are much higher than ever before (the Nasdaq, for example, soaring well over 200% above its year 2000 high), the M2-normalized data shows that the true strength of the stock market is well shy of the glory days of the 2000 top. In addition, the COVID-19 crash pushed this line chart beneath its ascending trend line, and the strength that followed (based on more trillions from the Fed in 2020) served only to push the line back up to the now-broken uptrend.

In a sense, this ratio chart illustrates how phony the market’s nominal highs have been for the past couple of decades. The true organic peak of the bull market occurred at the turn of the millennium.

Interest rates

Interest rates clearly have an enormous effect on the economy, influencing different sectors of the

30 YEARS OF THE S&P 500

The S&P 500 cash index identifies three distinct market phases during the past few decades:

1992-2002

Back when the equity markets were still relatively organic and the Federal Reserve more or less left them alone, a large boom-and-bust cycle occurred, as some might expect from natural market conditions. High tech led a strong bull run from 1992 through early 2000, followed by a bear market of about 18 months when the Nasdaq in particular was dealt a devastating blow.

2002-2009

Another boom-and-bust cycle occurred, permitted by the relatively organic conditions of the day. The equity markets remained strong from 2002 through 2007, led by the housing bubble. A financial crisis followed that was far stronger than the bear market of 2000-2002. The crisis wrought extraordinary damage that ushered in the virtual nationalization of the equity markets that continues even now.

2009-Present

In sharp contrast with the ascent, rounded top and subsequent descent of the previous two phases, this 12-year period has been a relatively uninterrupted ascending channel. The most severe interruption came with the COVID-19 crash, which lasted a mere three weeks but sliced a staggering sum from the value of the market. But all of that loss was recovered with the Federal Reserve’s deployment of trillions of dollars in cash. Since then, markets have ascended to unthinkable levels, and companies such as Rivian (RIVN)—with literally $0 in revenue—have attained market caps approaching a fifth of a trillion dollars.

Mostly upward

With the help of the Federal Reserve, the S&P 500 has been on the ascent most of the time since 1994.

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market in different ways. Higher interest rates tend to discourage consumers from buying real estate, but they help banks prosper. For lower interest rates, the converse is true. Generally, interest rates peaked in the early 1980s and steadily fell for decades after that. In 1981, no one would have believed that the 30-year mortgage rate would be 2.5% in 2020.

The next chart, “Interest rates,” right, illustrates the value of the S&P 500 divided by the 10-year interest rate and shows the relationship between those two components. It yields a fascinating chart. For a full half-century, the ratio chart was steadfastly bound by a price channel. That’s interesting with not just the defining trend lines but with the midline as well. The one exception to that “bounding” of the data took place during the pandemic, when interest rates were battered so long and stocks went so high that the ratio actually escaped the ancient boundaries of that channel. It has since re-entered its familiar path, yet is still in the upper half of the channel pattern, indicating the risk of lower stock prices ahead.

Overvalued technology

Of all the sectors that have increased in value since the pandemic stimulus began, none has benefited as much as technology. Semiconductors, electric vehicles, personal electronics manufacturers and internet sites have seen their stocks appreciate by hundreds or even thousands of percentage points in a matter of months.

An objective way to view this sector, which is historically overvalued, is by way of the RYT/IEF chart in “Tech stocks,” right. The RYT is an ETF dedicated to the technology sector, and the IEF is an instrument that represents yield. In a way, this is similar to the previous chart, except it focuses specifically on technology stocks.

There is a channel in this instance as well, although it extends back to

Interest rates

For a full half-century, a price channel has bound the ratio chart of the S&P and interest rates.

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Tech stocks

Stocks in semiconductors, electric vehicles, personal electronics manufacturers and internet sites have appreciated by hundreds or even thousands of percentage points. Pullquote ipsunt remque de volore, poccaborecero magnis nulloribus, nosaepe ditatibus as sitatas

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2008 (as opposed to 1973). Nonetheless, the channel is well-defined and provides an excellent “quick take” as to the relative value of this sector over the long haul. It illustrates how in 2012, 2015 and early 2019, tech stocks were relatively cheap, whereas the data in late 2021 shows this