As discussed yesterday, the exuberance in the markets, as witnessed by the net positioning of large speculators, has reached records on both ends of the spectrum. Those extremes, combined with spiking levels of “hope” in both the financial and economic data is all too reminiscent of the past.
I personally don’t like chart comparisons. Over the last couple of weeks, there have been numerous comparisons between the current market and that of the 1920’s, the 1980’s and just about everything else in between. The problem with similarities in market price patterns is that it fails to take into account the underlying factors such as employment, inflation, interest rates, and economic growth.
When looking at those variables along with some technical indicators, we find similarities to past bull market peaks.
“But Lance, all the economic data is improving. So the bull market still has room to go.”
Let’s take a look at the chart below.
In both previous bull market peaks we find, as measured as a percentage change from the previous bottom to current level, the following:
- CORE INFLATION rose 11.7% and 7.1% just prior to the recession. Currently, Core CPI is up 11.1%
- GDP GROWTH picked up by 7.5% and 5.1% just prior to the recession. Currently, GDP is up 6.8%
- EMPLOYMENT was up from lows by 9.1% and 8.6%. Currently, Employment is up 19.0%
- INTEREST RATES rose 50.8% and 51% from lows. Currently, Rates are up 87.9%
As we saw just prior to the beginning of the previous two recessions, such a bump is not uncommon as the impact of rising inflation and interest rates trip of the economy. Given the extreme speculative positioning in oil longs, short bonds, and short VIX, as discussed yesterday, it won’t take much to send market participants scrambling for the exits.
While I am NOT suggesting that we are about to have the next great market crash tomorrow, the current sensation of “Deja Vu” might just be worth paying attention to.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Real Investment Advice
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Real Investment Advice: Bringing the complex world of politics, economics, investing and personal financial wealth building to you in simple, easy and informative way.
Real Investment Advice is the home of the daily blog and weekly newsletter from Lance Roberts, Chief Portfolio Strategist for Clarity Financial. If you want to understand how money and the economy really work, this is your place to start.