Many investors are excited due to the S&P 500 attaining a new all-time high on July 26, 2021. However, based on the following the probability is high that a new Secular Bear, the first since 2000-2009 and 10th since 1802 was born on May 7, 2021. The bear’s birth coincided with the death of the Secular Bull market which began on March 9, 2009.
- S&P 500 Equal cap weighted all-time high occurred on May 7, 2021.
- The American Association of Individual Investors (AAII) bullish sentiment reading reaching its lowest level since October 2020. The plunge in sentiment coinciding at an all-time high indicates that investors have become anxious about the S&P 500 being at euphoric and historic valuation levels.
Identifying the beginning of a secular bear and end of a secular bull is significant. All prior secular bears have had minimum durations of eight years and declines of 45%. For more about secular bulls and bears and why there has been an equal number of them since 1802 view video entitled “Cyclical & Secular Bear – Knowing The Difference Makes All Of The Difference”.
The chart below depicts the S&P 500 reaching its Equal cap weighted all time high on May 7, 2021.
The chart below depicts the S&P 500 reaching a Cap weighted all time high on May 7, 2021 and reaching newer all-time highs since then.
The S&P 500’s Equal cap weighting is calculated by allocating an equal amount to each of the 500 member companies. Assuming a $1,000,000 Equal cap weighted investment into the S&P 500, $2,000 is invested in each of the 500 members. Under a Cap weighting the $1,000,000 is allocated to each of the members based on their market cap as a percentage of the market cap of the S&P 500. For example, under an Equal cap weighting for $1,000,000 invested, $2,000 would be invested into Apple and each of the remaining 499 members of the index. Under a Cap weighted S&P 500, $63,100 would be invested in Apple since its market cap is equivalent to 6.31% % of the S&P 500’s total market cap.
The tables below depict the market cap percentage weightings for the S&P 500’s five smallest and five largest members.
In the late stages of a secular bull market, investors are known to continue to invest in those companies which have led the bull. This results in the share prices of those companies continuing to reach new highs while the share prices for a majority of S&P 500’s member companies are in steady decline. For the secular bull which ended in 1966 it was the shares of Nifty Fifty. For the Secular Bull which ended in 2000 it was the dotcoms. For the secular bull which began in March 2009, it’s been the tech companies in the above table which have the five largest market caps in the US.
The charts below for Google and Microsoft depict that their share prices have increased much more than the S&P 500’s Equal cap and Cap weighted indices since May 7, 2021.
The charts below for Newscorp and Ralph Lauren depict that their share prices have decreased significantly as compared to the S&P 500’s Equal cap and Cap weighted indices since May 7, 2021.
The findings for the American Association of Individual Investors (AAII) sentiment survey for the week ended 7/21/21 indicated that the percentage of survey respondents who believed that stock prices would be higher over the next six months was 30.6%. The percentage was the lowest bullish sentiment reading since October 2020. The Bearish reading which was also 30.6% was the highest since January of 2021. The highest bullish reading of 56.9% for 2021 occurred on April 8, 2021. The lowest bearish reading of 19.76% occurred on June 3, 2021. The bearish reading was the lowest since a reading of 15.56% on January 4, 2018.
The recent AAII upward spike for bearish sentiment and downward spike for bullish sentiment are reminiscent of the 2000 euphoric high for the secular bull market which began in 1982 and ended in 2000. On December 9, 1999, the bearish sentiment reading was 11%, which was the lowest dating back to 10% on May 30, 1996. On February 24, 2000, the bearish reading spiked to 31%, the highest since June 24, 1999. Less than two weeks later on March 10, 2000, the crash of the NASDAQ began. On March 24, 2000 the S&P 500 reached its high for the secular bull. From their highs of 2000, through December 31, 2000, the NASDAQ declined by 51% and the S&P 500 by 13.6%. The S&P 500’s total decline was 47.5% and NASDAQ’s was 77.4%. The NASDAQ did not get back to its 2000 high until 2015.
The volatility of the AAII readings in late 1999 and early 2000, near the euphoric high of a mature (minimum age of 8 years) secular bull clearly indicated that investors had become anxious. The chart below is from a July 13, 2021 article by Lance Roberts entitled “Bubbles Are Evident After They Pop”. Lance’s chart explains the psychological phases an investor go through during a market cycle including the anxiety phase which follows Euphoria.
The above chart supports the rationale for why AAII sentiment readings become extremely volatile at euphoric and historic highs.
At the highs investors first attempt to rationalize that “this time it’s different”, the four most dangerous words for an investor to believe according to John Templeton. Since most experienced investors become anxious and nervous at historic market highs, they then become very emotional and are hair-trigger sensitive to volatility. Their anxiety accelerates the transformation of a market from a secular bull to a secular bear.
Based on the AAII sentiment readings becoming very volatile and the S&P 500’s Equal cap weighted index peaking on May 7, 2021, the probability is high that the secular bull market which began in 2009 has ended or will soon end. The S&P 500’s Cap weighted index will likely make new highs after the earnings for especially given the mega cap tech stocks have been reported for the second quarter ended June 30, 2021. The earnings announcements will likely result in a blowoff high for the S&P 500’s Cap weighted index for the secular bull which began in 2009.
Preparing to harvest gains before September 2021 is highly recommended. The Fall season ranks as the most volatile for the stock market. Strategies to enable a portfolio to grow during a steadily declining stock market must be implemented. To learn about what to invest in during a secular bear click to view video entitled “Cyclical & Secular Bear – Knowing The Difference Makes All Of The Difference”.