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Attached is an updated chart of the S&P TBill / Earnings Yield. The
decline from recent highs is due to an increase in trailing earnings and
a decrease in S&P price while TBill rates have remained virtually
unchanged for many months. I think Clyde Lee's suggestion of adding a
(regression) trend channel adds a nice shorter term trend perspective to
the long term historical perspective.
While the market tends to cycle from periods of historical extreme
opportunity and back to extreme danger, the trend channel shows that a
move to one channel extreme (sloping red/green) is invariably followed
by a return to the middle (yellow) of the channel. The middle of the
channel is now at 77% of the current ratio. A ratio reduction can be
achieved by any of the following: a) continued decline in price, b)
continued increases in trailing earnings, or c) decline in TBill rates.
Setting the issue of price aside for the moment, I believe we can expect
that trailing earnings will not increase and may begin declining and
that TBill rates will begin declining. A likely outcome is for trailing
earnings and TBill rates to decline in a somewhat complementary manner
while price decline accounts for the majority of the decline. Should the
ratio return to the lower extreme at 52% of current level, we could
expect a far greater decline. In summary, the trend channel on this
chart suggests that the S&P will decline to 1000 and quite possibly to
700. A return to the historical "Extreme Opportunity!" area below the
heavy green horizontal line would quite likely have the S&P declining to
500 or lower.
The most optimistic assumption (1000) should give Wall Street adequate
time to fire large numbers of bull market analysts (a routine cyclical
purge) and clear away much of the bull crap still flowing in the
streets.
Ear
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