CLSA: This Does NOT Look Like A Market Top

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For those wondering how long the current eight-year bull market can last, there is good word out from CLSA. The bank believes there is more upside ahead. “Whatever the near-term risks, the measures and momentum suggest that the primary uptrend remains intact,” CLSA’s Damien Kestel said in the Bits and Pieces newsletter last week. “On the upside our initial target for the S&P500 is at 2,465. In Elliott wave terms this advance is seen as wave 5, which provides a more aggressive upside target of 2,560-2,570.”

Also in similar territory is the Nasdaq 100, which at 441 weeks has now recorded its longest bull run without a 20% correction. It is also seen to be in wave 5 from an Elliott wave perspective.

Laurence Balanco, the bank’s technical guru, said the S&P500, despite its longevity, is showing few of the classic signs of an “impending top.”

Historically, bull-market tops are preceded by signs of selective buying and profit-taking, and characterized by “a classic distribution formation,” and “churning action.” None of this is apparently evident this time around.

Kestel expects the market to hit new highs late in the current quarter or early in the third, after a potential short-term pullback.

The ongoing bull market has stretched past 426 weeks, compared with the average 131 weeks. It is the second longest on record, having started from the lows of March 2009.

The S&P500’s run is part of a global bull market, with the air getting thinner up there, as CLSA observed. Multiple major indexes around the world are trading at or close to their all-time highs. Of the country constituents of the MSCI World index, 91% are trading above their respective 200-day moving averages, and unlike the 2014-15 run-up, the “current advance off the early 2016 low has broader global participation,” according to Balanco.

Elliott wave vs fundamentals? It is the same picture

CLSA also believes that higher multiples are here for longer than many might think, apparently because of a historic shift toward lower real interest rates and higher profit margins since 1997. The market now and in the past acts as if it believes the current higher levels of profitability are permanent, wrote Kestel.

“For a long and painful 20 years (since 1997) – for someone betting on a steady, unchanging world order – the P/E ratio (has) stayed high by 1935-1995 standards. It still oscillated the same as before, but was now around a much higher mean, 65% to 70% higher!” GMO’s Jeremy Grantham was quoted as explaining. “This is not a trivial difference to investors, and 20 years is long enough to test the apocryphal but suitable Keynesian quote that the market can stay irrational longer than the investor can stay solvent.”

Grantham’s argument probably means that if you are expecting a quick or explosive market decline in the S&P 500 that will return us to pre-1997 ratios (perhaps because that is the kind of thing that happened in the past), “then you should at least be prepared to be frustrated for some considerable further time,” Kestel said.

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