S&P 1650, December 31st
We see the SPX losing 22% over the next 2-3 months. The call is primarily based on technical factors; however, given the market’s current valuation, the fundamentals also support this view. We contend that the texture of today’s price action is very similar to the early 2000’s, as illustrated below.
NYSE composite 1998-2003 versus NYSE comp 2012-present (80% time compression)
And on a shorter time frame.
We overlaid the charts after finding many fundamental similarities between the early 2000’s and today:
2. EV/EBTIDA consistent with the early 2002 (alphahat.com)
3. Leverage at similar levels – debt/assets as high as early 2000’s, as well as debt/equity
4. Number of IPOs with no earnings above 2008 and consistent with 2000
5. Dollar price action similar across both time periods – smaller yellow box in-line with analog
6. And the percentage nominal GDP growth from non-discretionary items at comparable levels, flashing late cycle signs
With this as our backdrop, we overlaid our current fundamental view of the US economy and our forecast for the next 6-9 months. We see the US entering a recession in the first quarter of 2017, as consumer spending declines materially, outlined in detail here.
In addition, we see a few elements adding to the thesis:
Given the scenario outlined above, we see the probabilities heavily favoring a downside move. We should know over the next two weeks if we’re wrong or not.