Stocks are most vulnerable when optimism is at an extreme and its long-term trend reverses. This is when careless investment decisions are exposed, as well. Right now, the P/E is well above its 48-month MA and secondary up trendline, and is showing no signs of weakness.
In the fall of 1981, the twenty-year US bond yield peaked slightly above 15% and has been zig zagging down through each successive business cycle since. During the last one hundred and sixty-years or so, the average secular, (very long-term) trend in rates has lasted around twenty seven-years. After thirty five-years of declining rates, the current secular bear is getting long in the tooth.
Anyone thinking that we may get a repeat of the spectacular 2001-2008 and 2009-2011 rallies in commodities may have to think again, at least that’s what’s being hinted at by many of the long-term technical indicators. You could say it depends on what the definition of the word “is” is, to quote a well-known Clintonian expression. In this case, it all depends on what the direction of the secular trend is, as we explain later.
A major anxiety amongst stock market participants revolves around two key factors that appear to be on a collision course. The first is an overvalued stock market. The second, is an emerging trend of rising interest rates.
The purpose of this article is to make the case for a primary trend rise in yields. If this assumption turns out to be correct, it is within the realm of possibilities that this same rally may also be a turn in the tide for the initial advance in a new, very long-term or secular uptrend.