The Greedometer® gauge represents strategic risk levels in the S&P500 stock market index. The gauge is intended to warn prior to major / historically important stock market crashes and is supported by a database initiating in January 1999. As of January 2015, we are in the 10th Greedometer sequence. Each of the previous nine sequences were followed by the S&P500 crashing or beginning to crash. Each of these crashes were stopped by the Fed and/or European Central Bank (ECB). There have been no missed calls, and no false alarms.
The time between sequences has been steadily and rapidly dropping.
This chart clearly demonstrates the time between Greedometer sequences is following an exponential decay with a near uniform decay constant. The fact this data follows an exponential decay suggests the underlying cause of the decay remains the same — and is inescapable. I have long maintained the U.S. economy has been coping with a balance sheet recession since year 2000 resulting from the 1982-2000 debt binge.
UPSHOT: The Greedometer data suggests (as of February 2016):
- We are in the 10th Greedometer / mini Greedometer sequence.
- More central bank actions (I call them sugar bombs) have been taken over the course of the past year than over the previous 9 sequences combined. These actions have not stopped the sequence but have slowed it. This has prolonged the S&P500 topping process, slowed the pace of collapse, and built up a great deal of near term market risk.
- We are going to see a protracted stock market collapse in 2016 unless the Fed and/or ECB (and other major economy central banks) do something to stop it — if they can. Because the time between Greedometer sequences has dropped to 0, the default scenario is this sequence cannot be stopped. Translation: this S&P500 crash cannot be stopped.
- The crash will not end until the S&P500 CAPE (adjusted P/E) drops to the 6-7-8 range. This suggests a 65-75% drop in the S&P500 from the 2135 peak to the 550-750 range.