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The Golden Cross or Curse?
The S&P 500 closed out the first half of the year by posting new all-time monthly and quarterly closing highs, and continued to drift higher through Thursday. Several well-known stock market bulls have been making the rounds in the financial media over the past week or so to take their victory lap and gloat about “being right.”

Of course, these are the same stock market bulls that came into the year as bullish as ever. The same people that reiterated their bullish views at or near the February peak. And the same group that abruptly walked back their bullish views in early April following a 21.3% decline at or near the market’s nadir. They simultaneously slashed their 2025 EPS estimates, and raised their recession forecast odds to 60% or more for the year. But this cohort then jumped back on the bull again once the S&P 500 reclaimed its 200-day MA. And while these bulls generally embrace narratives and abhor technical analysis, they can’t seem to stop talking about the fact that the S&P 500 just posted a “golden cross.”

www.stockcharts.com
For the unindoctrinated, a golden cross is a bullish trend following signal that occurs when the 50-day MA crosses above the 200-day MA. As a trend follower who respects technical analysis, we have found little to be gained from chasing moving average crossover signals. Statistically, a golden cross is as likely to mark an interim high as it is to mark an upside acceleration. Recent evidence to that effect can be found by observing the results following the April 14th “Death Cross” (a bearish version of the same ilk). That signal failed spectacularly. Just one week after triggering a death cross, the S&P 500 posted a higher low and has since proceeded to rally nearly 23% to post marginal new daily, weekly, monthly, and quarterly all-time record closing highs.

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Valuation Matters
While most financial pundits claim that valuation is not a precise timing tool, we would argue that it’s just a matter of investment horizon. Our former mentor and partner, Steve Leuthold, spent the better part of his 45-year career as an investment strategist proving that valuation is indeed an exceptional market timing tool. In 2012, he was presented with the CMT Association’s Annual Award for lifetime achievement in technical analysis. For his acceptance speech, he presented data and analysis supporting the conclusion that when the price/earnings (P/E) multiple reaches the top decile of historical valuation, forward 10-year returns are not just below average, but rank in the bottom decile of the historic record.

www.stockcharts.com
Steve used his own 5-year “normalized” earnings methodology to calculate the P/E for the S&P 500 each year in order to smooth out the cyclical peaks and troughs. A more widely accepted approach to normalizing earnings was developed by Professor Robert Shiller of Yale University. Shiller’s cyclically-adjusted price/earnings ratio (CAPE) has monthly data dating back to January 1872. When overlaid upon the S&P 500 index in the chart above (S&P data begins in 1926), we can clearly see a pattern whereby the past peaks in the CAPE ratio coincide perfectly with the past price peaks in the S&P 500 index. Today, the S&P’s CAPE ratio at over 38x is again in the top decile of historical valuation. It’s approximately 17% above the October 1929 peak CAPE ratio of 32.5x, and just 13% below the March 2000 CAPE ratio of 44.2x.

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A Brief History of Bubbles
Both of the aforementioned periods rank as the two biggest stock market bubbles in U.S. history. The first of which was followed by an 89% drawdown before bottoming three years later. The second was followed by a 58% drawdown before bottoming in 2009. Both were periods of great technological achievement. Radio Corp of America (RCA) was the most beloved growth stock at the height of the roaring ‘20s stock market bubble. It was the company that ushered in broadcast radio — perhaps the most important new technology since the invention of the telegraph. RCA’s market value topped in September 1929 at $574 million. By May 1932, the stock price had collapsed by 98%, from a split adjusted high of $114.75, to a low of $2.63. The company survived the great depression by realigning its business model and muddled along for five decades until it was eventually acquired by General Electric in 1986 for an inflation-adjusted value of about $800 million.

@WalterDeemer
During the Dot-Com mania, the undisputed heavy-weight champ at the time was none other than Cisco Systems. CSCO was considered to be the most important company building out the internet. Their high-speed networking solutions were the state of the art, and their service and reliability was second to none. Without CSCO, the internet as we know it today would not have been possible. So beloved was CSCO, that it became the first publicly traded company in history to reach a half-trillion dollars in market capitalization. It’s market value peaked on March 27th, 2000 at $569 billion. Buy October 2002, CSCO’s stock price would decline by 93% from a high of $82, to a low of $5.66. CSCO too has been muddling along for the last 23 years or so, but despite being added to the prestigious Dow Jones Industrial Average (DJIA) in June 2009, the stock price has never fully recovered, and remains more than 16% below its March 2000 all-time high.

www.stockcharts.com

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The Mother of All Bubbles
Today’s hot dot is NVIDIA, the new king of the hill. On July 9th, NVDA’s market value hit an all-time record extreme of $4.0 trillion. It’s currently the most valuable publicly traded company in history. NVDA designs graphics processing units (GPU), which is a specialized electronic circuit made to accelerate the processing of images, videos, and complex mathematical calculations. It was originally developed for the video gaming market, but is now widely used in machine learning for generative AI.

The company has an asset light business model, so it has no real manufacturing assets — just contracts, intellectual property, inventory, some industrial and office real estate, and a small VC incubator. TSMC is its sole supplier, and over 90% of the company’s products are currently manufactured in Taiwan. If the Chinese PLA decided to impose a military blockade surrounding Taiwan tomorrow, NVDA would be effectively out of business. It’s a shell of a company whose tangible book value equates to about $78 billion (2% of its current market value), or about $3.18 per share. The stock is trading for about $160 today. Does anyone want to hazard a guess as to where NVDA’s stock is headed once this bubble pops?

www.stockcharts.com

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