ZeroHedge is running this chart at the moment. It’s a nice visualization and certainly food for thought. For the record, we agree that it sure looks ugly. Cumulative / consecutive returns show the market entering the historic “crash-zone” right about now.
It’s important to note however, that this visualization would have done little to predict the 2008 collapse. Granted, credit markets played a stronger hand in that period than equity-market valuations.
It’s also interesting to note that while the 2000 peak appears higher, the visualization is cumulative, and it’s within 23-quarter range of relatively strong performance. On the other hand, we have another couple of quarters to go to reach the insane rolling returns seen prior to 1937.
So if history is any guide (and we concede as always that past performance may not be indicative of future “returns” — particularly in this era of unprecedented central planning), then the above chart would indicate that the market could fall apart tomorrow… or within a few quarters at our current rate. Longer than that and we’ll be in never-before-seen territory — in terms of 23-quarter rolling returns, at least.
So what would the bulls say?
More typically, the bullish argument is made via the 10-year rolling return chart. We show this here for contrast, because it lends greater weight to the bullish argument. (And in case you don’t already know, we’re not buying the bullish argument):
Here’s our problem with this visualization: The 10 year rolling-return view straddles two market-cycles (pretty much always). This long-term smoothing obscures the effects highly volatile short term trends. The crash of 1987? It was just a blip. Long term rolling trends are interesting, but they play disingenuously into the hands of bulls because as we all know, the nature of market dynamics is to have long slow upward trends punctuated by exceedingly rare and devastating crashes. Turning points become blurred and the slow-trend becomes magnified. This is nice from a rear-view macro perspective, but it provides little in the way of near-term analysis. From the 10-year chart, the takeaway is confusing. At what point does the market turn? What analysis would have loosened your hands in 1986 or 2007? And even 2000 doesn’t look like so toppy, because the long-term nature of the chart conceals blow-offs. The 23-quarter rolling return chart gives a far crisper picture.