The Curse Of Sisyphus: Will The S&P500 Decline 50% From The 1,550 Summit Once Again?

| About: SPDR S&P (SPY)

With Greece currently dominating the financial headlines once again, it is no small irony that a figure from Greek mythology appears to best represent what we have experienced in the equity markets over the last fifteen years. Sisyphus-- founder and king of Corinth-- as punishment for his hubris and disrespect for the gods, was condemned to an eternity of hopeless and futile labour: he was forced to roll a huge boulder up a steep hill, but each time he reached the top, the massive stone would always roll back down, forcing him to begin again.

Does this ordeal sound vaguely familiar?

Take a look at this 15-year chart of the SP500 (NYSEARCA:SPY):

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Now that is a Sisyphean labour of futility if I ever saw one! And what is poor Sisyphus doing at the moment? After watching his boulder tumble from the heights of 1,550 in October 2007 to a low of 666 in March 2009, the Corinthian King has been dutifully pushing it up the steep hill. He appears to be approaching the ominous point where the trickster market gods will stop his progress and force him to watch the boulder plummet to the agonizing bottom of the hill once again.

If Sisyphus is indeed struggling up the same hill, then he has only another 250 points of upward strength remaining before he hits the summit level of 1,550, where the boulder will obstinately stop, pause, and slowly begin stumbling toward the depths. What will happen when the SP500 hits the summit level of 1,550 again? Will we see a collapse from this level similar to the ones we experienced in March 2000 and October 2007, or will this time be different?

In the week of March 20, 2000 the SP500 hit an intra-week high of 1,553, and from this summit height the boulder did not stop falling until the week of September 30, 2002 when the SP500 hit an intra-week low of 794: a decline of 48.8%. In the week of October 8, 2007 the SP500 hit an intra-week high of 1,576, and from this summit height, the boulder did not stop falling until the week of March 2, 2009 when the SP500 hit an intra-week low of 666.79: a decline of 57.7%. Are we in store for another 50% decline in the SP500 once it touches the 1,550 summit?

In the Greek myth there is nothing that Sisyphus can do to prevent the boulder from rolling down the hill despite the fact that he is fully aware of what is going to happen; he has no choice but to exhaust himself in pushing the heavy boulder up the hill, fully cognisant of the complete and utter futility of his task. And yet he cannot do otherwise. The knowledge of what is going to happen is absolutely useless to him. He can only toil, sweat, suffer, and hope for a different outcome which he never sees. As soon as he reaches the summit the boulder rolls down the hill, an eternity of futile labour.

But we are not Sisyphus. We can use the knowledge of what is happening (or might happen) to our advantage and trade the markets accordingly. What have we learned from the market action of the last fifteen years?

1. It is crucial to protect our trading capital from catastrophic losses

Our TrendCharts Model Portfolio entered this week of trading at 84% CASH. We are in a very defensive position as we approach the Sisyphean Summit. We may see a bullish run in the SP500 from its current level of 1,330 to 1,550 if the Europeans announce plans to address their debt problems that calm the markets, but once the SP500 hits that 1,550 level, we will be at a significant pivot point for global equity markets.

The last fifteen years has shown that being heavily weighted in equities with the SP500 around the 700 level has been a wise bullish strategy, but being heavily weighted in equities with the SP500 at the 1,550 has not been a wise bullish strategy. We will tread carefully on this summit, not wanting to be crushed by a backward rolling boulder.

2. Not all market boulders roll the same way.

Stock selection becomes an important aspect of trading when the general markets get stuck in long-term trading ranges. Identifying stocks that outperform the markets cannot only protect trading capital but can also greatly enhance the returns on that trading capital.

Below are three stocks that have not fallen victim to the Sisyphean Curse over the last fifteen years:

Apple, Inc. (NASDAQ:AAPL)

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Nike Inc. (NYSE:NKE)

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McDonald's Corp. (NYSE:MCD).

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: I am long SPY.