How Far Will This Bull Run?

The art of forecasting lies in finding the correct historical analogy to the current market situation. I'd like to illustrate this principle by explaining how one can estimate a reasonable price target for the bull market that began from the S&P 768 level in October 2002.

The basic idea is very simple. This bull market will probably travel about as far as previous bull markets that developed in a similar situation.

The closest analogy I can find for the current bull market is the bull market in the Dow Industrials which carried that average from 570 in December 1974 to 1026 in September 1976, a move upward of 80%. The reason this is the best analogy is that the Dow had previously dropped from a high of 1067 in January 1973 to its 570 low, a move downward of 46.6%. The drop during that 1974-74 bear market was nearly as big as the 50.5% drop from 1553 to 768 during the 2000-2002 bear market. So I would expect the move up from 768 to approximate in length the move up from the 1974 low at 570. Calculating 80% of 768 we get a target of 1382 for the bull market which began from 768.

Next let's focus on some finer detail. Can we find analogies to the upmove which I believe started from the 1136 level in the S&P 500 in April 2005? My first guess is that the move up from 1136 will be approximately as long as previous upswings in the bull market that began from the 768 low. By my reckoning there were four previous upswings: from 768 to 954 (24.2%), from 788 to 1015 (28.8%), from 958 to 1063 (21.4%), and from 1060 to 1229 ( 15.9%).

The shortest of these upswings carried the market upward 15.9% and a rally that big from the 1136 level would stop at 1316. On the other hand, if we discard the smallest and the largest of these four upswings and average the remaining two we can calculate a target of 1395, not far from the 1382 target for the bull market itself. In my judgment this higher target is a more likely stopping point for the move up from 1136 because of the extreme levels of bearishness I think I see currently.