S&P 500 at 3rd perilous high since 1871!

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by Michael Markowski

On January 8, 2021, the S&P 500 reached its third perilous high since 1871 according to the Extreme Analytics (EA) algorithm.   Recently concluded research of 150 years of empirical data revealed that 1929 and 2000 were the first-ever perilous highs for the S&P 500 since its inception.

The research findings also led to the development of the Extreme Analytics (EA) algorithm which identifies perilous highs for stock markets and indices.  The Bull Vix, another algorithm that identifies Bullish Sentiment Anomalies (BSA), which has been integrated into the EA, is projecting a double-digit correction to begin by February 5, 2021.  The Bull Vix is projecting that Subsequent to the double-digit correction, the S&P 500 will fail to recover back to new highs and will instead decline 50% to 80% by 2023.

The ability to differentiate a perilous high from the hundreds of record and bubble highs over the last 150 years, is a significant breakthrough.  The first two perilous highs resulted in declines of 50% to 85% within two years after the perilous high was reached.  To identify a perilous high the EA algorithm monitors the S&P 500’s price to key financial valuation ratios below after the Bull Vix has identified a Bullish Sentiment anomaly (BSA).  The two primary price ratios the EA monitors to identify a perilous high for a market or index:

  • Shiller P/E (price to earnings) Ratio
  • P/S (price to sales) Ratio

The chart below for years 1871 through 2021 depicts the two highest Shiller S&P 500 P/E ratios which occurred in 2000 and 2021.  The PE of 34.8 for the S&P on 1/8/21 was the highest since June of 2001.

A P/E ratio has the potential to temporarily increase when a sharp downturn for earnings occurs.  Since this obviously occurred for 2020, research was conducted on the S&P 500’s P/S and P/B ratios from 2000 through 2020.  Throughout my 44-year career in the capital markets, I have found the P/S ratio to be the most reliable comparative valuation metric.  The sales or revenue for an index or company is much less volatile than earnings during economic downturns.  For the 12 months ended June 30, 2020, the revenue for the S&P 500 increased by 3.3% vs. a 6.8% decline for its earnings.

Note. The research for P/S could not cover more than 20 years due to empirical data not being readily available.  

The historical quarterly P/S chart below depicts the two highest S&P 500 P/S ratios since the fourth quarter of 1999.  The two which coincided with BSA occurrences include the first quarter of 2000 and the P/S’ record high in fourth quarter of 2020.  

The red shaded area on the upper right-hand corner of the chart depicts the P/S at a substantial discount to the S&P 500’s long-term trend line.   Based on the S&P 500’s extreme overvaluation the 2021 perilous high has the potential to wreak more havoc than 2000.  From 1999 to 2017, the S&P 500’s trend line was at or below its P/S ratio.  Due to the P/S ratios from 2017 to 2020 being well above the trend line the S&P 500’s revenue must grow at a much faster pace than its long-term historical growth rate.   If the S&P 500’s revenue growth rate does not accelerate sufficiently the index will revert back to or below the P/S ratio.

The Bull Vix (BVX) algorithm is the second key component that powers the Extreme Analytics algorithm.  The BVX identified the first BSA to occur since January 2020 on December 3, 2020.  The chart below contains the S&P 500’s quarterly prices and the 11 BSAs which occurred from 1999 through 2020.  The chart depicts that the S&P 500 declined significantly after BSAs occurred in 1999/2000, 2007, 2015, 2017/2018, and 2020.

The Bull Vix’s nine gains and one loss for its alerts to trade the CBOE Volatility Index (VIX) for the concluded minimum five-week post BSA occurrence trading periods are depicted in the chart below.

Subscribe to one of Bull Vix’s offerings to trade VXX and UVXY shares after a BSA has occurred.  The one-time payment fees which cover the entire post BSA occurrence trading period range from $49 for alerts to trade VXX and UVXY shares and $499 for alerts to trade VIX, VXX and UVXY call options. Click to subscribe.   

The BSA was discovered from empirical research of the VIX which began in November 2020.  See 11/30/20  “VIX Research Uncovers Huge Upside Opportunity for December 2020” article for more about the discovery.  It resulted in the development of the Bull Vix algorithm to trade VIX related securities during the 11 post BSA occurrence trading periods from 1999 to 2021.  For more about Bull Vix see 12/9/2020 “SPIKES; S&P Down & VIX Up by year end due to Rare Anomaly research findings!”.   Also, see www.bullvix.com.    

The empirical data for the S&P 500’s price ratios and the coinciding BSA occurrence in December 2020 confirm that the index is at a perilous high.   According to the Bull Vix algorithm, which issues alerts to trade VIX related securities after BSA occurrences, the 2021 high will occur and the decline will begin now through February 5, 2021 at the latest.  Note.  Parameters for final date for crash to begin are subject to being extended since the metrics which the Bull Vix algorithm monitors change weekly.  Subscribe here to receive Bull Vix’s crash prediction date updates.   

Assuming the coming decline is on par with the 1929 and 2000 post perilous high declines, the probability is 100% for the S&P 500 to trend lower through 2023 with a decline of 50% to 80% from the 2021 high.  From the 1929 perilous high to the 1932 low the index declined by 85.3%.  From the 2000 perilous high to the 2002 low the S&P 500 declined by 50% and the NASDAQ by 83.6%.

Finally, the two prior 1929 and 2000 epic highs coincided with the beginnings of two of the last three secular bear markets in the US.  The two had durations of 20 and 9 years respectively.  The cover of the highly recommended 5:10 seconds secular bears video below depicts that it took until 1954 for the 1929 secular bull high and until 2013 for the 2000 high to be exceeded.

Based on the S&P 500’s behavior after the two prior perilous highs a decline of 50% to 80% for the index from its 2021 high by 2023 is highly probable.

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