On Friday, 18 May 2012, the state of order that had existed in the stock market since 4 August 2011 came to an end.
You can see that is the case in our highly refined chart below, which is based upon the daily values for both the value of the S&P 500 index and its trailing year dividends per share, rather than the average monthly values for both that we typically feature at Political Calculations.
What we see is that the daily closing value of the index broke below its lower 3-Sigma "statistical equilibrium limit" curve that defines the bottom of the range where we could have reasonably expected stock prices to be found at least 99.7% of the time during this relative period of order in the stock market. The very low probability that we would see such an outcome if the statistical equilibrium defining the period of relative order was still in effect leads us to make the determination that the existing state of order in the market has broken down.
For us, "order" in the stock market can be said to exist whenever stock prices and their underlying dividends per share are closely coupled. When order exists in the stock market, the basic relationship between the two may be described in mathematical terms by a power law relationship, where the exponent is the ratio of the exponential growth rate of stock prices with respect to the exponential growth rate of dividends per share over time.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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