Twice In One Year
It is a bit hard to comprehend that twice, in the same year, I would be writing primarily the same article.
In early January, I penned the following:
“When you sit down with your portfolio management team, and the first comment made is ‘this is nuts,’ it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended — ‘this is nuts.’”
At that time, I tweeted the following chart, which compared the Nasdaq to the S&P 500 index. The bands on both charts are 2-standard deviations of the 200-WEEK moving average. there are a couple of things which should jump out immediately:
- The near-vertical price acceleration in the markets has been a historical hallmark of late-stage cycle advances, also known as a “melt-up” phase.
- When markets get more than 2-standard deviations above their long-term moving average, reversions to the mean have tended to follow shortly after that.
That was so 6-months ago.
Here is where we are today.
As I warned then, not only has the price of the Nasdaq gone parabolic, this time it is pushing 3-standard deviations of the 200-dma.
Fundamentally Detached
The divergence is particularly notable when you consider the economic and fundamental differences between now and then. (While we are discussing the Nasdaq, to maintain consistency with previous reports, I am using earnings estimates for the S&P 500 to show the relative change.)
When looking at the acceleration in the price of the Nasdaq, and particularly within the small group of stocks driving that advance, you can begin to fathom our concerns. Furthermore, the divergence between the Nasdaq and the S&P 500 index is emulating the late 90’s. (The horizontal red line is where the ratio was last Friday just for perspective.)
Source: Lance Roberts | RIA
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