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Stock Market Trend History & Current Levels Of Valuation

|Includes: DIA, IWM, QQQ, SDOW, SPY, ProShares UltraPro Dow 30 ETF (UDOW)

There has been a lot of talk and discussion on whether the stock market today is in a bubble or overvalued. You can find good arguments for and against where today's markets are in terms of valuation and whether or not they are in a bubble. Here is my take on the situation, using the IMTS system.

The Dow Jones Industrial Average

(click here for the full-sized image)

Since 1898, the Dow Jones has established multiple levels of peaks and troughs. Standard bull market peaks (the blue area in the chart) occur in the 0.03 to 0.08 range, and these often take place in between the times that the Dow Jones hits bubble territory. Bubble territory is defined in the IMTS as being above 0.100. After having its bubble peak back in 1997-1998, the Dow Jones is in the middle zone after a bubble and looks to be reaching one of those intermediary peaks.

Another interesting aspect is that, after a bubble peak, the highs get progressively lower over time until a deep drop occurs to complete the descending wedge. Afterwards, the levels inverse and each peak gets progressively higher until another bubble peak happens. This pattern seems to repeat all the time.

** Note: You can see where the different areas on the chart correspond to the usual IMTS printout here, being taken from June 1906 in the Dow Jones:

The blue area on the chart corresponds to the middle column in the above readout (yellow/orange), with the bottom value being 0.089 in this example. The red area on the chart corresponds to the column right next to it (white background above, ending with 0.04 here), and the short green spikes on the chart correspond to the last column on the right here (white background, with -0.011 being the last number above).

Another recurring pattern is in the types of bull market peaks that occur. There seem to be two kinds: single peak spikes and double-peaks. The double-peak spikes have the first upward spike, followed by a trough with a second, higher spike happening just before the big drop back to the 0 area or below. Currently, it seems that the Dow Jones is completing its second peak now. It definitely could go higher towards the 0.100 range, but it will most likely stop short of that.

On the negative, bear market side, you can see that most drops (with the exception of the Great Depression and to a lesser extent 2008) stop in the -0.03 to -0.08 range (pretty close to the opposite, bull market peak areas which are 0.03 to 0.08, as stated above).

The S&P 500

(click here to view the full-sized image)

The S&P 500 chart begins at 1952 (sorry about the dates not showing up), and continues until today. The index is getting close to bubble territory and may indeed get there as an uptrend is in place. But that push past 0.100 may only come on the next spike up after a drop, as the top of the current spike may be rolling over. Only time will tell.

A clue as to the direction of the current spike may be seen in the way the red area is starting to drop away from the blue, showing a divergence that could be indicating the momentum is stalling and rolling over. Past examples of bull market spikes show that during the strong initial push upwards, both the blue and red areas of the chart are close together, but as momentum wanes and dissipates, the blue continues up while the red falls behind and the gap between the two increases a lot. That process could have just started in the S&P 500.

Just as in the Dow Jones, the S&P 500 seems to have two different types of bull peaks: single and double-peaks. Also, except for bubble periods (0.100+), the S&P 500 bull markets tend to stay in the 0.04 to 0.08 range, much like the Dow.


(click here for the full-sized image)

The NASDAQ is in an uptrend in this chart. Both the peaks and troughs (starting with the Dot Com bust) have gotten steadily higher. The NASDAQ was in an uptrend from 1975 to 1984, then a downtrend from 1984 to 1991 before beginning a new uptrend that culminated with the Tech Bubble.

Unlike both the Dow and the S&P, the NASDAQ seems to have a well-defined pattern of creating steadily rising trends out of big drops & bear markets. It also gets into bubble territory far more often than the previous two markets. It is currently in a bubble and it is not easy to identify how much longer the NASDAQ can continue as it still seems to have upwards momentum at this point. NASDAQ drops seem to happen rapidly according to past history.

Russell 2000

(click here for the full-sized image)

The Russell 2000 is currently the hottest stock market index. It is in bubble territory but the widening gap between the blue and red areas could be signalling the start of the market rolling over. In addition, the short-term spikes (small green) are making lower highs and beginning to converge towards the 0 line. In the past, this has signaled the Russell will be suffering from a size-able drop from the current levels of momentum.

Since the Russell 2000 data only goes back to the late 1980s, the sample size is small but we can infer direction and patterns based on what has happened in the other indices. The IMTS measures both momentum and psychology, and is able to spot repeating patterns with all markets no matter which era they happened.

If you have any comments, feel free to post them below or to email me via the contact form link above.

Franjo Ivancic

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.