Sonders - Why the Stock Market Isn't in a Bubble

Liz Ann Sonders, Chief Investment Strategist at Charles Schweb, wrote in a note to clients, "It's premature to be calling this market a bubble".

She has 3 indicators to back up her thesis :

1. S&P 500 Rolling 10-Year Returns

2. S&P 500 Valuation at Bull Market Peak

3. S&P 500 Bull Market Performance-Duration Plot

To read her full report click 'Sonders - Why the Stock Market Isn't in a Bubble'.

After reading the report, I superimposed the Dow Jones Industrial Average for the same period on to the 'S&P 500 Rolling 10-Year Return' and I have the following diagram.

From 1960 to 1973, the 'S&P 500 Rolling 10-Year Return' was in a down trend, but from 1962 to 1966 Dow moved from 560 to 1000 for a 78% gain. From 1970 to 1973 Dow moved from 680 to 1000 for a 47% gain.

From 1988 to 1996, the 'S&P 500 Rolling 10-Year Return' moved side way but Dow moved from 2000 to 5500 for a 175% gain.

From 2003 to 2007, 'S&P 500 Rolling 10-Year Return' was having a free fall but Dow ran from 7590 to 13930, gained 83%.

Conclusion : I see no definite correlation between 'S&P 500 Rolling 10-Year Return' and the market direction based on Dow.

For the other two indicators, when the current reading is close to or slightly below the long-term average, it may be premature to classify the market a bubble but it doesn't mean the market won't change direction. In fact, whenever the current reading is close to long-term average, my thinking is that time is running out.

I have no doubt that the assets bubble is there and it is getting bigger with all the money printing. But with near zero interest rate and with so much liquidity in the market, I really don't know when the bubble will burst. The only thing I can do is to have some faith in my own wave count and hopefully that market is well behaved and hopefully I can see some signs from the chart and get out before the bubble burst.


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