S&P 500: Could We Get a Seven-Year Double Top?

This really isn't a prediction as much as it is just mere speculation about what could happen to the market in the coming weeks and months. Short term movements don't really concern me, as I mostly just focus on undervalued companies regardless of market level, but sometimes it's still interesting to point things out.

A lot is being made about the Dow making new all-time highs lately, but as many of you know, the S&P 500 is still about 3% below its peak from the year 2000 at the 1,527 level.

Here's a 10-year chart of the S&P 500 index:

One possible scenario would be for a long term double top around that level. A lot of strategists are dissatisfied with the 7% correction we got in March and want some kind of retest of that level, or even better, a full 10% correction in the S&P 500 so we can get that monkey off our back.

Is a double top around 1,527 the most likely scenario? Of course not, but it's still interesting to think about. I definitely would not rule it out and it would make for some good headlines. The market is clearly overbought, so if we truly need another pullback, as many seem to think we do, what better way for it to play out? It would make for a very intriguing chart pattern, one that technical analysts could cite for years.

Comments

[muguwmp:]

Thank you for your perceptive remarks on the stock market. If you look at it from a historicl perspective, you wll find about an 8.0% average growth rate in market averages from the bottom in 1932 to the top in 2000. This included the period from 1966 to 1982 in which the market couldn't get above the 1,000 mark on the Dow 30. From the breakout in 1982 at 1,000 to 11,750 in 2000, the market advanced at slightly better than 15% p.a., about twice the rate from 1932 to 1966. Now, since 2000, the Dow has moved into new highs after a 7-year dip, while the S&P 500 still has 3% or so to go to reach its 2000 high. So in this 7-year period, the market has been essentially flat. But if you measure from 1982 to 2007 as going from 1,000 to 11750 it is still high at about 10.35% p.a. If you measure from 1,000 to today's average of 12,960 (as I write) or 13,000 on the Dow, you get 10.8%, the difference having been earned or created in just the last month or two. So, the market is stilll running better than it's long term average. Of course, even at 8.0% p.a. (it could be less depending on the dates you use) without the 16 year period between 1966 and 1982, and assuming a normal market during that period, the Dow today would be above 23,000.
But that didn't happen and we have to contend with the real world, which today is low to moderate real GDP growth, modest CPU inflation and low to moderate long-term interest rates. So, with that in mind, an argument can be made that we are in for another period like 1966 to 1982 in which the Dow (as a proxy for the market) reaches 13,000 then backs off, tries again and so until the growth rate since 2000 begins to average out into 8% or so on average. The federal government made a mess of things that contributed to the 1966 - 1982 sickness, and it certainly can do that again. Your double-top in the S&P may not kick the market into a new long-term high growth mode after all is said and done. It will be interesting to see what happens. Thanks again for your perspective.

2007 Apr 23 12:23 PM