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Market Crash:  Lucky #13

Posted by kdadmin on September 28th, 2015.

Market Crash:  Lucky #13

Apparently, it’s the end of the world as we know it. Or, wait …

The Fear and Greed Index is at lucky number 13. Are you setting your traps? It might be time to Hunt the Black Swan. Or, it might be a bit premature …

Several days, and several dozen points, ago the Fear and Greed Index was 9.

Oh, and EXACTLY one year ago, the Index was also at 13. The great thing about this index is that it’s really no more than a summary of option market sentiment. Which is great for those of us who like to follow that sort of thing. The problem, really, is that we haven’t seen October earnings.

Forward vs Cyclically Adjusted PE Ratios. With the current market drop, the Forward PE on SPY is estimated at17.6, whereas the Cyclically Adjusted PE ratio is still 24 (down form 27.5 this summer). In other words, the PE going forward is closer to 17.6, while looking back over 5-10 years, adjusted for historical inflationary rates is higher. While some of the gap can be attributed to the inability of Shiller’s (CAPE) model to account for zero inflation, it still points to a potentially overvalued market.

Bottom Line. We are within spitting distance of the October 15 low in 2014. That market was fanned by tepid earnings, the Fed ending QE, and the Ebola outbreak in western Africa, the market hit a seven month low only to rebound at year end. We are now at an 11 month low, and could break through the floor we hit 11.5 months ago.

What would happen if we broke through this floor? Would the world end? No. We are still looking at slowly declining unemployment, an incredibly accommodating Federal Funds Rate policy, an extremely strong dollar, and growing, albeit slowly, consumer demand. Sure, we are tempting stagnancy, or worse, deflation. But does this mean we should ignore stock entirely? No. Frankly, I’d like to see a little more wreckage before I start loading up on stocks. But a little bit in here and there isn’t a bad thing, especially with the significant stake we have in a now, very profitable, bond market.

One Last Thing. Is it just me, or has everyone lost their minds over China? Has everyone forgotten that China has nothing near a transparent economy, or stock market? The government employs to a two market system to prop up prices. Have we forgotten the recent 100% run up and down in that economy? Does THAT point to stability? Shouldn’t this give market pundits pause when considering the importance of “failing” Chinese economic numbers?

Consider this. IF China really wants to join the global economy, with a clear and transparent financial system, THEN they are going to have to go through a period of “unfortunate” economic news to get their, um, “approved” numbers in line with their “real” economic numbers. Seems to me that this”crisis” have to include at least a little bit of poorly executive political maneuvering.

Which, if true, could mean this whole “Chinese Crisis” is overblown, weighing on market prices, and giving us an opportunity to Hunt the Black Swan.


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