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Stock Market Risk Returns To Historic Extreme

Published 08/08/2012, 04:13 AM
Updated 07/09/2023, 06:31 AM

The S&P 500 index closed moderately higher on Tuesday, extending the volatile uptrend from early June and approaching previous long-term highs of the cyclical bull market from 2009.
SPX CHART 1
With respect to cycle analysis, the move higher yesterday reconfirms that an alpha phase rally is in progress from late July. Additionally, the move well above the beta high (BH) of the previous cycle reconfirms the bullish translation that has persisted since early June.
SPX CHART 2
Although mainstream sentiment has once again shifted from despair to optimism, the big picture perspective remains unchanged. The US economy remains burdened by a historic amount of debt and it remains likely that we are entering a new recession. Although the typically bearish rising wedge formation that developed in June and July did not terminate with a violent breakdown, the volatile uptrend from early June will almost certainly be followed by a sharp decline similar in character to the downtrend in May. At a current duration of 41 months, the cyclical bull market from 2009 is overdue for termination and it remains likely that a cyclical top is in the process of forming.
SPX CHART 3
Earlier this year, our computer models indicated that stock market risk had increased to the highest one percentile of all historical observations from the last 80 years. The severe decline in May reduced that risk slightly, but the speculative advance during the last two months has caused the risk/reward ratio of the stock market to deteriorate to another historic extreme. As always, nearly anything can happen over the short-term. However, from a long-term, investment perspective, it remains a time for extreme caution and we remain fully defensive.

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