The 46' Parallel

By: Erik Swarts | Wed, Mar 5, 2014
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The 46' Parallel

With the debate continuing on whether the domestic equity markets are stretched at another historic extreme, we thought we would take a variant look at the fundamental metric many have voiced their opinion on recently - that being, Robert Shiller's cyclically-adjusted price-earnings (CAPE) ratio. While we would echo the esteemed Professor's remarks that the ratio shouldn't be used to market time crashes or make short-term trading decisions, we view the series with broad appraisal of form, flow and proportion - and then in comparative perspective with the current market environment to glean any potential insights.

As much as the 29' vintage or even the 37' tape scares up the most headlines and eyeballs these days, there is a historic analog (one that we are fairly certain no one references and few remember, sans Cashin), that does resemble traits of the current market environment from several different metrics and measures - e.g. yields, valuation, asset cycle, Fed policy and even post-war strategic posture.

However, what really brought us to the 46' parallel, was simply looking at the CAPE ratio on a longer-term horizon and with reference to the yield/rate cycle - which we would argue primarily drives the boat from a valuation and asset cycle perspective.

10-Year Yields
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All data courtesy of www.multpl.com and based on yearly data as found on January 1st of each year


A few observations between the two series charted above:


Why look at 46'?

Although the metric is very close to the valuation peak in 07', we would view a pivot lower this year as this cycle's equivalent to the ratio's historic trend through 46'.

This perspective is supported by similarities in:

SPX 1956 versus 2014 Monthly Chart
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SPX 1942-1947 Daily Chart
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SPX 2009-2014 Daily Chart
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CCi CRB Monthly Chart
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CRB:SPX Yearly Chart
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How Russia, the Ukraine or the new Twitter diplomacy fits into the equation is anyone's guess. But if you needed any more spurious evidence - the 46th parallel does run straight through Crimea...

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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austrian-money-supply/