The funk of forty thousand years
And grizzly ghouls from every tomb
Are closing in to seal your doom
--Michael Jackson
In his weekly comment, John Hussman plots past instances of the overvalued, overbought, overbullish extremes in the SPX that we're currently witnessing.
In addition to the relationship between the extremes and market tops, the increased frequency of extreme occurrences is also interesting. While certainly not a perfect fit, the pattern resembles a half life (i.e., exponential decay) function.
Also reminiscent of the diminishing returns concept--recently observed w.r.t. QE.
position in SPX
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2 comments:
In the early part of 1928, the Federal Reserve Board began to feel a little uneasy about the situation in the stock market, where prices had been rising with alarming rapidity. It wanted to see a moderation so as to prevent an eventual stock market crash. In January and February, discount rates at the Federal Reserve banks were raised from 3.5% to 4%. Between April and June, an additional increase to 4.5% took place at all but the four western Reserve banks. At the same time, their holdings in government securities were reduced and open market rates rose, with the call loan rate reaching 8.6% by December.
All of this did not prevent continued speculation in the stock market. As 1929 began, the Fed began to directly pressure member banks to stop increasing their loans to brokers. The policy of pressure and increased rates, however, did little to stem the tide of speculation and money was made available to brokers through nonbanking loans.
Although there were worrisome declines in March across the board and in certain stocks during the summer, there was no stock market crash until the fall. The peak in market indices took place in early September, and this was followed by a gradual but persistent drop.
~u-s-history.com
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