Has The S&P 500 Topped At Exactly The Same Price As Gold?
April 24, 2014
Chances are high that the S&P500 is in the process of making a huge top. We will discuss our rationale in this article, based on the gold to equities ratio, as well as current market conditions.
The extremely interesting fact is that spot gold has topped at exactly the same level as the S&P500 top (to date, on a closing basis). Compare the following data:
- On September 2nd 2011 and September 5th 2011, spot gold in US dollar closed at $1,895.00 an ounce.
- On April 2nd 2014, the S&P500 closed at 1890.90, its all time highs.
The following chart shows both assets over the last three years. Chart courtesy: Stockcharts.
Gold to S&P 500 ratio from 2011 to 2014
Both assets have traded visibly inversely correlated since mid-2011:
- When gold peaked at $1,895.00 an ounce in September 2011, the S&P500 was establishing a major intermediate bottom at 1200.
- In the last days of December 2013, spot gold made a double bottom right below $1,200 an ounce. Since then, the yellow metal has rallied nicely and convincingly, outperforming every other asset in 2014.
- The S&P500 has established its all time highs at 1890.90 one week ago. There are convincing signs that this a major top. Interestingly, this is just 3 months after gold’s major bottom.
The following chart shows looks at the gold to S&P 500 ratio in the last 100 years. Note that the red arrows and blue ovals are own additions. Chart courtesy: Macrotrends.
Gold to S&P 500 ratio from 1914 to 2014
The last three years are marked in the blue oval at the right. One of the following two statements must be true:
- Either the gold vs S&P500 ratio has reversed course since gold’s peak three years ago.
- Either the gold vs S&P500 ratio went through a corrective phase in a secular trend.
The second scenario would be a replay of the 70ies. Back then, the secular uptrend in gold corrected significantly and equities experienced a cyclical uptrend. As the chart points out, the cyclical trends lasted for three years.
We cannot exclude the first scenario indicated above. However, we estimate the probability to be very low, in the range of 5% to 15%, based on the “set of circumstances” we see in equities and in the economy.
Of course, the fact that the S&P 500 and gold have reached the same (price) level and is merely a chart observation. It does not tell anything as such. The more important point is the set of underlying market conditions. In that respect, we currently observe conditions which, in our belief, confirm the chart observation.
The “set of circumstances” we discuss in the remainder of the article are related to the equities market, in particular the US, but also the broader economic context and even the monetary system.
First, US equities are rising for 5 years now. Technically, the current bull market is +270 days old. This is the second longest bull run in the last 80 years, being beaten by the bull run which started in October 1990 with a duration of 406 days. Source: Standard & Poors.
Second, based on the Crestmont P/E ratio, the S&P Composite is trading at very high levels, only beaten twice in the last +100 years, i.e. in 1929 and 2000.
Third, margin debt in US equities is at all time highs. SeekingAlpha released an article which explains that “margin debt at the New York Stock Exchange rose to an all-time high of about $465.72 billion in February from its previous record high of about $451.30 billion in January. There is a strong positive correlation between NYSE margin debt and SPY.” Although the equities bull run is currently still intact, at least from a technical perspective, the risk of speculation is getting higher as well. The more speculation, the sharper the inevitable correction.
Fourth, IPO fever has popped up again, in a similar fashion as during the highs of the dot com era. According to Sentimentrader, the share of money losing IPO’s (i.e., IPO’s with negative earnings) stands at a remarkable 83%. This is just a hair’s breadth away from the all-time record from mid-March 2000, when 84% of the companies that insiders were selling to the public could not prove their business models.
Fifth, according to ShortSideOfLong, in the last 140 years, there have only been 7 prior events where markets gave investors returns in excess of 100% over 5 years. The chart below shows that 6 out of the 7 instances have led to serious corrections or outright crashes, while the one in 1956 lead to only a mild pull back. The chart also shows that equity market trends with 1.5 standard deviations above the 140 year historical mostly mark an intermediate or long term top. “The market has only ever traded at these overextended levels 8.6% of the time or 143 months in the last 140 years (with the outright majority of that during the late 1990s tech bubble).” It is very likely that the run into 2014 is going to produce another major decline.
Sixth, the following chart shows that the average small investor portfolio has a 70% allocation to stocks, a level. Although not visible on the chart, the remaining capital is evenly allocated to bonds and cash. Zero interest rate policy (ZIRP) inflates capital to risk assets, leading to asset inflation. Participation of small investors typically peaks at the end stages of a bull run.
The rest here, ... goldsilverworlds.com
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