S&P 500 Now vs. Nikkei in 1989; How Low Can We Go From Here?

I have often compared the current situation in the US to Japan in the 90s. Indeed, a lot of the characteristics of the current contraction match what went on in Japan back then.

Since 1989, the Nikkei index has dropped from just below 40000 to now around 9000. It is conceivable that US stocks will see similar declines over the next decades, along with spectacular counter trend rallies from time to time.

Below I put together a chart that shows how the Nikkei has fared since the bust of the Japanese credit bubble in 89 vs. the development of equities in the US (S&P 500) since the bust of the US credit bubble in 2007:


As you can see, since the crash, both charts have behaved rather similar. Immediately after the crash, the Nikkei, too, staged a phenomenal 35% rally from around 20000 to around 27000. If US equities continue mimic the events two decades ago in Japan, it is indeed conceivable that we may see an S&P 500 in the 200s or 300s in ten years or so.

Along with that would come several periods of renewed optimism and spectacular rallies. Just as an example, look at the Nikkei’s rally from 1998 through 2001, a 140% increase!

All this would be consistent with my long term outlook for the US economy:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Just for fun, I attempted an Elliot Wave count of the indexes above because I think that the EWave formation really screams at you in this case:


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S&P 500 More Expensive Than Ever

The common notion is almost unanimous. Green shoots, bottom, recovery, V shape, problems fixed, done … There is certainly no lack of optimism on Wall Street and in the financial news media. Certainly we cannot possibly go any lower, can we?

But the S&P 500 is embarking upon gratuitously high price earnings ratios:

… in fact, there has never been a time in history since tracking this data where the S&P500 has been more expensive than it is right now. The highest up to now had been in 2000 when it was at a PE ratio of around 45.

Think stocks are looking cheap right now?

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Another Bear Market Rally Comes to an End

The recent bear market rally was kicked off on March 10th with the S&P500 at 676 and has most likely peaked on April 13th at around 858.

The market has been flooded with phoney reassurances, in particular for banks. It started with Citigroup expecting great results for Q1 and went on recently with Wells Fargo and Goldman Sachs. But as explained already, most of these announcements left a lot of doubts:

Citigroup – CEO’s phony statement sparks phony rally
Wells Fargo Needs Another $50 Billion
Goldman’s Orphan Month

Matt Theal at Minyanville writes:

The S&P 500 opened down today but quickly rebounded before selling off with Goldman. The index briefly tagged the 856 level before closing at 841. The market’s inability to get above the 850/860 square out (per Professor Cooper) shows that the level may be a top for the current rally.

Tomorrow will be a big day for economic data. First, traders will be watching the CPI, Empire Manufacturing, Net Long-Term Tic Flows, Capacity Utilization, and Business Inventories. These reports will be due out after the bell. Some market pundits blamed today’s sell off on weak retail sales, if there are any numbers that are worse then expected, watch for the market to sell off tomorrow. Right here I think all the positive data is priced in, it feels as if we are setting up for a sell off.

On top of that, it’s options expiration week. Today is Weird Wollie Wednesday:

“Weird Wollie Wednesday”, created by Don Wolanchuk, references the Wednesday prior to options expiration. The observation made by Wolanchuk stipulates that this day is made up of manipulated price action which is primarily related to the faster deterioration of options premiums during the week prior to options expiration; many traders are rebalancing and rolling their options forward. Using WWW as a guide, it is not uncommon to see strong moves down in the market place on the Wednesday prior to options expiration week.

To pick up on Mish’s S&P 500 Crash Count: In Elliot Wave Terms, we might have seen Wave 4 of 5 down and should now be entering wave 5 of 5 down.

Wave C down, broken down into 5 waves:
Click on image to enlarge.

Wave 5 closeup:
Click on image to enlarge.

According to Elliot Wave theory, Wave C down can extend wave A down by 1.618 times. Wave A was from 1,572 down to 800 which is a drop of about 772 points. This means that wave C down could be as many as 1249 points. Wave B peaked at 1,561, which means that wave C could take the S&P500 as low as 312.

It is questionable whether wave 5 of 5 down will take the S&P that low. It is probably reasonable to assume that it will bottom out somewhere between 312 and 600.

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