Major Market Averages Likely to Move Sideways for Years to Come

This is a monthly chart of the S&P 500 from 1970 to present (August, 2009). Also shown is the 150-month moving average. The ordinate is logarithmic.

click to enlarge


It would seem significant that the S&P 500 broke through its 150-month moving average in 2008 for the first time since 1974. Actually, I couldn't get the 150-month moving average to register on the chart prior to 1982, so I'm guessing somewhat on this date based on interpolation of the visual data.

Some obvious key points from the chart. The 2000-2003 bear market did not break this 20-year uptrending moving average, but this bear market did. One could almost draw a line of support from the 1974 lows to the 1982 lows to the 2002 lows all the way to the 2007 highs. Like the 150-month moving averge, this tendline was broken for the first time in 35 years in 2008.

Also of interest, the RSI indicator for the collapse of 2008 has traced out a very similar pattern to the 1974 bear market. Although some, like Warren Buffett, believe 1974 was a particularly good time to buy stocks, in fact, the S&P 500 went sideways for another 6 years following the recovery from the 1974 bottom.

Given the myriad of economic headwinds facing the US economy, it seems entirely plausible that the major market averages will likewise move sideways for years to come. The trading range may be as broad as S&P 800 to S&P 1200 (the location of the 150-month moving average). At present, S&P 1000 is right in the middle of this range.



Above is a 100 year chart of the Dow Jones Industrial Average for an even broader view of US stock market price action (courtesy of Minyanville). Following a nearly two decade long bull market after World War II, the US markets went sideways from about 1965 to 1982 (17 years). More recently, the S&P 500 first hit 1000 in early 1998, 11 years ago. If the S&P 500 follows the post-1974 pattern of bear-market recovery and 6 additional years of sideways action, the next bull market would be slated to begin in 2015, exactly 17 years after the S&P 500 first hit 1000 in 1998, the same amount of time the markets went sideways between 1965 and 1982.

If this sort of symmetrical time analysis of market movements appeals to you, other asset classes or other stock markets may be more rewarding for the next few years.

Comments

[chap08:]

I'm not sure it tells you much to look at nominal charts over such a long period. Real, inflation adjusted, charts are more meaningful and tell a different story.

Aug 19 07:16 AM

[Dr. O:]

Great idea. That would make the 17 years (plus or minus) of sideways movements in the markets even more painful. Adjusted for inflation, with the DJIA going nowhere between 1965 and 1982, one lost 75% to inflation during that time.

On the other hand, shouldn't we consider adjusting for deflation? With housing prices sinking, and incomes falling, anytime one can make money on any market trend, it's an even bigger win.

Aug 19 07:45 AM

[expat in China:]

The markets are over valued!

relaly the credit bubble of the last 15 years has ended and the GDP will reflect that for the next 7 years or so until the gov and consumer debt is reduced.

so the sp 500 should be valued at 1995 levels. 400!

Aug 19 09:00 AM

[JPSmith:]

The big question is what markets will do better than the U.S. over the next ten years. Is decoupling real or not?

Aug 19 11:50 AM

[Larry House:]

You present a valid point.

Aug 19 01:53 PM

[AuGod!:]

You can't bounce until you hit bottom. There is a there there but we haven't found it yet. In the end, it may be that a new economy will arise first in the U.S. making this century better than it began for "America". Post industrial America, fecund with promise, sustainable organic agriculture, water conservation, green housing, cleaner air and maybe not so much into world domination. Now those and more that add not subtract from quality of life are worthy American values.

Aug 19 02:35 PM

[Kimball Corson:]

Excellent article. As the economy continues for the next few years to be mixed, neither much heading up, nor much, down, the indicies are likely to do the same, I think. This is the best longer run take I have seen so far, though it does not suit congenital bears or bulls.

Aug 19 03:38 PM

[Steven Vincent:]

I think you are on the right track. We may be on the cusp of a new bull trend led by a new technological revolution.


On Aug 19 02:35 PM AuGod! wrote:

> You can't bounce until you hit bottom. There is a there there but
> we haven't found it yet. In the end, it may be that a new economy
> will arise first in the U.S. making this century better than it began
> for "America". Post industrial America, fecund with promise, sustainable
> organic agriculture, water conservation, green housing, cleaner air
> and maybe not so much into world domination. Now those and more that
> add not subtract from quality of life are worthy American values.

Aug 20 12:12 AM