Shiller [CAPE]

Robert Shiller has been warning us since late last year that his CAPE metric is signalling significant overvaluation of stocks.  To be fair, he was saying the same thing pretty much throughout 2014.  Shiller is pretty careful to remind folks that CAPE is not a short term market timing tool and others are even less delicate about this admonition. 

• Side note: since when was it OK to talk so plainly as to call someone's work "crappy" in public print by major industry media sources?  This may seem subtle today but 5 years ago it would have resulted in something of an uproar.  The loss of what I have long referred to as "fake political correctness" is a sign of the end times for the debt Ponzi.  Back during its growth phase, political correctness was the big buzzword.  A smooth talking con man could get ahead but straight talking, no-bullshit people who actually contributed stuff to society like Ross Perot were "out there".   With money materializing from thin air in the form of debt, bullshit and academic titles were more important to many than straight talk, action and results.  This will change dramatically over the next decade and in fact I see many signs that the change is already well under way.

In any case I want to chime in on the CAPE discussion from a TA point of view.  In my analysis, the absolute value of the CAPE number is less important a crash predictor than where it is in the EW cycle. 

• In a liberal fake money environment, after all, nothing is absolute and everything is relative.  Likewise in society, everything is a shade of grey with few absolutes in terms of morality.  If you do bad in the name of the greater good then that's OK (even if you are the main beneficiary from all the supposed good you did...).  If you have a good lawyer then every law is open to interpretation.

But I digress.  I believe that CAPE is tracing out an expanding wedge as shown below.  The last peak was a 5th wave throwover which then fell below the 1929 peak (heavy red line), back tested it from below and then bottomed in early 2009.  Since then it climbed to test the middle tine of Andrew's pitchfork from below, bounced downward and then smashed back up through, likely during 3 of C.  At this point, the C wave is the same length as A and it is again up against that heavy red resistance line at a time when EW charts are predicting that a significant reversal is very near. 

After the 5th wave of an expanding wedge forms we should see 5 waves in the opposite direction.  I model that the last move down to the mean of 16.6 was wave 1.  Now with the a-b-c retracement looking complete I think we are at or very close to wave 2 being done.  If this is correct then a very sudden reduction of CAPE is right ahead as wave 3 down unfolds.

That middle tine is meaningful to the herd folks and we know this because it has been used as support and resistance multiple times over the last 100 years.  If that breaks down as I believe it will then we will know that the great deflation has begun.  That will be the case if CAPE falls below 25 ish.