Long Term Trends Being Tested

Today’s guest commentary comes from Andy Lees, who sits on a macro derivatives sales desk at UBS in London. Andy delivers some of the most consistently interesting and provocative commentary to come out of the sell side.

He emailed these comments to clients last week — note that the very long term trend lines in the broad Wilshire 5000 are now at risk. As the historical charts show (especially the Dow) when this trend line gets broken, markets get especially volatile.


Andrew Lees, 8/21 6:37:48

The Wilshire 5000 is now just 2.5% above the post 1974 trend line, which comes in at 12,632.60 – (the break was in 1982 as Mexico blew up). Similar trends exist in the S&P, Nasdaq and Dow (see charts 2, 3 & 4 attached), with the 30 shares of the Dow being a little more volatile around the trend than the larger indicies.

The trend has been going for almost 35 years, so surely that just means that the economy has continued on a similar development path for the whole of that period.

The Wilshire 5000
1971 – 2008

That trend however has been based off decling demographic dependency ratios, outsourcing, and ofcourse the availability of cheap energy. All of these trends look as if they are set to reverse; the dependency ratio with certainty (with the 2ndry effect of pension funds selling down assets) and the cheap energy & therefore outsourcing, almost certainly.

There are of course other trends such as technological improvements and efficiency gains, as well as debt growth etc, but these are themselves totally reliant on the bigger trends mentioned above; ie they cannot happen in isolation.

The trend is your friend. Theoretically you should not bet against that trend continuing, and that is what a lot of people will say; why will it be any different this time? The point is betting that the trend will break is infact betting that things will stay the same. The trend in equities is just a reflection of the underlying fundamentals, and given that we know that these are changing, then betting that equities will continue to go up whilst these underlying fundamentals are changing structurally, is completely illogical. Its not only illogical, but its also expensive, as life and pension funds with liabilities the other side, will tell you.

At some stage the printing presses will be turned on sufficiently far that the equity fall just becomes a derating rather than a nominal fall, but for now my bet is that this trend is likely to start to break down.


SPX 1971 – 2008


Dow Industrials 1971 – 2008


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What's been said:

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  1. blue commented on Aug 26

    it would be a shame to miss the long opportunity, probably won’t see it for another dozen years.


  2. Northern Observer commented on Aug 26

    So is the conclusion sell America?
    If so where do you buy?
    Maybe the next 5-10 years will just be a terrible time to be in equities, anywhere. A global negative economic environment that spares no index.

  3. ff2199 commented on Aug 26

    That’s got to be the wrong chart for the Dow.

  4. Dan commented on Aug 26

    Hey Barry,

    At what point would we have a definite breach of trend?


  5. Bruce commented on Aug 26

    Well, no comment on the new home sales for today, but one rather esoteric bit of information struck me..


    Floyd Norris comment today:

    “Many of the homes are not new, at least in the traditional sense. Of the sales, only 18,000 were houses that had already been completed,as opposed to houses under construction or not yet begun. At the end of the month, 169,000 completed new homes were being offered for sale. THE MEDIAN AGE OF THOSE HOMES IS A RECORD 8.5 MONTHS. (emphasis is mine…)

    So, this says that these aren’t really apples to apples each month, that the “new” home is getting older and older before it is sold…If you defined new home as built, say, less than a month ago, then you’d have apples to apples…

    Bruce in Tennessee

  6. DL commented on Aug 26

    Perhaps we’re going to need a new trend line at some point.

    I have long viewed the changing “demographic dependency ratio”, (more simply, the aging of the population) as the biggest long-term threat to the stock market. The only way that the medicare and social security issues are going to be resolved (in my opinion) is if the financial and currency markets force the politicians to act.

    While this is a significant long-term threat to the stock market, it’s difficult to make any timing decisions based on that.

  7. Andrew commented on Aug 26

    Agree with ff2199, isn’t CCMP the ticker for the Nasdaq composite? INDU is the Dow Industrials ticker.

  8. DL commented on Aug 26

    Northern Observer @ 11:39:19 AM

    To the extent that the stock market will be driven in the future by demographic forces, it would seem that one way to go would be to buy currencies of countries with younger populations. Perhaps some of the currencies of Asian or Latin American countries (those which are not tied to the dollar). However, I think it will be at least 10 years in the future before the aging of the population begins to affect stock prices.

  9. Alessandro commented on Aug 26

    Since indeces are denominated in dollars and are not inflation adjusted, should we consider those trends for real or are just a shadow of the the printing presses?

    I don’t see why everybody looks at real GDP figures but accpets nominal stocks valuations.

  10. BG commented on Aug 26


    I agree with everything you’ve said in your last two posts except for the last sentence.

  11. blin commented on Aug 26

    There is something definitely wrong with the Dow chart unless it is based in euro’s/D-marks.

    Does anybody have an answer?

  12. Some Jerk commented on Aug 26

    well, the top of the ‘dow’ chart says CCMP, which is NASDAQ.

  13. blin commented on Aug 26

    Well, I guess we can leave it to Some Jerk to figure it out.

    Thanks, it’s obvious now.

  14. JustinTheSkeptic commented on Aug 26

    Rome is burning and CNBC is playing guitar Hero. Bring on the Huns, Nuns, Vandals, and Visigoths.

  15. Mark E Hoffer commented on Aug 26

    yep, blin, the DJIA chart would be similiar to the SPX chart.

    though, way to keep an eye open to see past the labels..

  16. Martin commented on Aug 26

    Not a technician myself but simply eyeballing a longer term chart of the Dow shows a clear rising trend at least back to the post depression low in 1932 – see

    Similarly the S&P shows a rising trend back to its inception. I would be more persuaded if there was some comment from Lees about how this perceived 1974-present trend fit into some larger framework.

  17. Marcello Maurizio Pavan commented on Aug 26

    what do these look like INFLATION ADJUSTED (even using the laughable CPI) ? seems to me that would a much better measure of what is going on

  18. Pat G. commented on Aug 26

    “At some stage the printing presses will be turned on sufficiently…”

    To get the traction necessary, to jumpstart the economy which will overshoot and create the serious inflation.

  19. constantnormal commented on Aug 26

    A couple of other charts that make clearer the stair-step nature of bull vs trading markets are at:


    and …


    The proof of which version of the future we are embarked on will not be known for sure until we are at least halfway through it. Reality turns out to be that way, with the significant decisions becoming obvious only after the fact.

    But just playing the odds, run-ups and periods of consolidation (a.k.a. trading ranges) seem to last between one and two decades — it doesn’t take a rocket surgeon to bet on our now being in a decade-long trading range. As to exactly what the bounds are on that range, and precisely when it began, look back in 3-5 years or so, as we approach the next period of expansion.

  20. Damian commented on Aug 26

    Is it just me, or does the trendline on the SPX make no sense in any form of classic trendline drawing?

  21. Myr commented on Aug 26

    Those trend lines(which the market has already broken) were first brought up by Pachter and the Elliot Wave crew, fyi. Just trying to give credit where it’s due.

  22. cm commented on Aug 26

    Alessandro: Of course. Why do you think are the “trends” straight lines on a logarithmic scale? Lines on a logarithmic scale correspond to exponential functions on a linear scale.

    An indicator that exhibits constant-rate growth will appear as a straight line, with the slope of the line corresponding to the rate of growth.

    This “normalization” of exponential growth is the very purpose of logarithmic scales.

  23. JustOne commented on Aug 26

    Another macro factor to consider is the end of Moore’s Law. Technology has been a major driver of productivity improvements for the last 30 plus years (while speed and size of electronic circuits improved by a factor of 2 every 18mo or so). But now circuits are nearing the size that is limited by the size of atoms. They can not continue to shrink unless circuits smaller than atoms becomes possible … Moore didn’t predict that.

    More improvement in price per MIP or GB can be expected for a few years and the price of computing will continue to drop as competitive pressures make circuits more of a commodity. However the curve is definitely flattening as circuit elements approach 10nm in size. Beyond 2020, improvements will become much more constrained and the benefit of that to the economy as a whole will stagnate.

    Without another major technology improvement (like steam, steel, assembly automation, internal combustion, air transport, microcircuits, etc.), long term growth will be impacted and the support line in these curves will be violated as the economic rolls over with stagnating productivity.

    What’s on the horizon to provide continued support? Nanotech, carbon-carbon fiber and biotech may help but will they replace the loss of a major productivity engine like microcircuits? If not equtities will feel the pressure of more than a baby boom retirement wave.

  24. MarkTX commented on Aug 26

    Another thing to consider with charts of indexes is that they do not have the same membership set over time.
    (Stocks are dropped/replaced over time).

    Thus When A stock is dropped out of the major indexes, (Usually for very bad reasons)
    it is no longer counted.


    Enron does not still count as ZERO!!!!!

  25. scorpio commented on Aug 26

    i like that big generational double top in the W 5000, first in 2000, second in 2007, now the downhill begins

  26. a different chris commented on Aug 26

    >is if the financial and currency markets force the politicians to act.

    Pressure them to do what, exactly? Outlaw growing old?

  27. Tom E. commented on Aug 26

    The money has to go somewhere. Real Estate is dead for a while, bonds are not attractive due to inflation. That leaves equities.

  28. DL commented on Aug 26

    a different chris @ 4:57:12 PM

    “Pressure them to do what, exactly? Outlaw growing old?”

    Someone has to get screwed. Maybe the age for eligibility for social security will be raised to 75. Or maybe anyone who makes more than $40K/year will become ineligible for medicare. Or maybe anyone with more than 200K in liquid assets will get nothing. Or maybe the combined payroll tax (employee + employer) will be raised to 25%.

    Whatever it is, the reaction won’t be pretty.

  29. Simon commented on Aug 26

    For years I’ve asked myself..how does wealth get transferred inter-generationally on a large scale?

    I’ve always figured that there had to be an asset bust that would allow income earners to purchase the assets left behind by the baby boomers.

    I still believe this. But the world being vertually a single market you’ve got to consider that the younger aggressive income earners who will be able to purchase the surplus assets from the baby boomers may not be from within just the western countries.

    Among the advantages the west has had is political and moral capital. In America particularly this capital has been badly eroded by all the reasons discussed on this blog and many others.

    The threat now is not just to the retiring baby boomers and the American Economy in general. It is to the younger generation.

    Will American pull its socks up in time?

  30. Adam C commented on Aug 26


    Makes sense to me, as the trendline touches on at least three lows, by the classical definition of a trendline.

    However, it always helps me, both in my own TA and in analyzing the TA of others, to remember that the drawing of trendlines is often highly subjective depending on the bias of the drawer.
    For example, a bearish trader would draw a different trendline than a bullish trader, on the same chart, because their underlying expectations are different.

    Its an art, not a science.

  31. PeterR commented on Aug 26

    Interesting that some of the monthly uptrend lines are drawn (deliberately?) through/above some of the monthly lows. [notably SPX in 1987 or 1991? — can’t make out the date]

    This kind of personal chartist revisionist perspective is insulting IMO, especially for you BR to pass it along and not comment on.

    Not to mention that monthly data is notoriously “broad brush,” and that a “break” of any monthly uptrend line is suspect at best.

    Is SPX/SPY about to revisit its much longer-term (early 1900’s) MEDIAN line around 1150/1200? [first chart in link above.]

    If one were to redraw — fairly — some of the uptrend lines above, they might come close to another move down to the median line IMO.

    Cheers to all, hopefully The Bush Cartel “House of Cards” will not collapse entirely until after the election.


  32. Matthew Camp commented on Aug 26

    At DL:

    >Someone has to get screwed. Maybe the age for eligibility for social security will be raised to 75. Or maybe anyone who makes more than $40K/year will become ineligible for medicare. Or maybe anyone with more than 200K in liquid assets will get nothing. Or maybe the combined payroll tax (employee + employer) will be raised to 25%.

    Absofrigginglutely! You could not be more correct my friend, and many that now “count” on having the benefit of the dollars that have been so diligently deducted from their paychecks will soon (~20 years) find that what they paid/had taken from them will get them NOTHING.

    It will be ugly, and, unfortunately, I fear the only way whatever piece of garbage that resides in the White House 20 years from now can stay in power is by by handcuffing our future generations for 100 years.

    Yet whoever it is will do it to stay in power, because you, and I, and every person paying into SS will have demographics on our side and well, it will be, as I said, an ugly time for America.

    As if it isn’t already.

    Res Ipsa Loquitor

  33. vv111y commented on Aug 26

    JustOne @ 4:15,

    Scenarios for continued growth would likely be transhumanist type scenarios. It may be that a transhumanist scenario is the only possible future growth story.
    You hint at such technologies – they may also be applied to an extension of Moore’s Law.
    I would argue that productivity increase could also continue with this trend.

  34. Tom commented on Aug 27

    Worldwide black swan……..depression making the 30’s appear as Disneyland.

  35. Richard Kline commented on Aug 28

    That’s a fascinating chart from your source, Big Guy, and the kind of long trend technical background I much appreciate your blog for. Thanx.

  36. Jim D commented on Aug 28

    These lines might as well be drawn in crayon.

    The more obivous trendline fit conforms to the local bottom on ’89 – and by that line, we’ve been skating under the trendline since the 2002 recovery, with a breakdown already starting – which is often how trends break, anyway…

    In short, as grim as he is, he’s still too optimistic – mostly optimistic about the immediate past.

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