- The blue line is the S&P 500 Index.
- The red line is a fair value of the S&P 500; this is generated by regressing the fed’s balance sheet against the stock market. Thus every red point is the fair value of the S&P 500 given by the level of the Fed’s total assets.
- The green area is the divergence between the red and blue points. It represents how overbought/oversold the S&P 500 Index is relative to the Fed’s balance sheet.
- 93% of variance in the stock market is explainable by the level of total assets held by the Fed.
We can see that October’s market wobble was the most the stock market has been oversold since the Euro crisis of 2011. Currently the index is just below its fair value.
Market tops seem to be associated with much higher divergences to the upside. This implies an S&P 500 top of 2150-2200 based on the Fed’s current balance sheet. Judging by today’s current market action, the world agrees with this assessment. At least for now…