S&P 500 EARNINGS (INFLATION-ADJUSTED)

Another good chart from Chart of the Day! (click image to enlarge)

Good charts are always worth more than a thousand words. All charts are subject to many interpretations. The glaring mistake in the chart as presented is the failure to recognize that the US economy benefits from productivity to produce a geometric growth pattern. The best regression line for the data would probably be 6 or 7% compounded rates. The log scale used does not do the data justice. The information revolution we are enjoying appears to have increased the nominal non-inflation adjusted growth rate from 6 to 7%. This same data posted as non inflation adjusted data on a standard scale would look very different.

A pattern in the data that is consistent with the "investment clock" that I use is that high earnings can fool investors into investing at the wrong time. The market is a forward looking animal it does not have eyes in the back of its head. The chart as presented might lead one to conclude that the cycle peak in earnings has already been reached. When one understands that he "line of best fit" is a geometric line, one can extrapolate from what happened in the mid 1990's. The comparison is that earnings exploded in the first half of the 1990's, hesitated for a short time and then took off again to finish the typical pattern of a strong decade finish.

If you have not noticed from my other posts, I am very optimistic about the market for the next few years. At least 30 times a day, I am getting buy signals. While writing this, I have been listening to a replay of the "Neil Cavuto Show". Even after today's explosive rally, the panelist have tended to emphasize the trading range. Then jokes were made about not needing the S&P break out chart that was prepared weeks ago.

Sentiment was very negative before the big rally and current indications are most traders will sell into the rally or at least sell strongly when the market gets back to the peak of the trading range. A break out would cause a lot of folks to need to jump back in the market at higher prices. Markets explode to the upside violently because the break outs come when short-term traders are out of the market or on the short side. Over the past few days, I have posted links to several bearish posts by respected short-term traders; the makings of a violent turn like we saw today. Will this move be the big break? Who knows? Are conditions ripe for a multi-year move? Yes!