Thursday, October 04, 2012

12 year trading range

Here is a monthly bar chart showing the cash S&P 500 over the past 15 years.

You can see that the 2000 top of the dotcom bubble began what so far is a 12 year trading range. Such ranges are common after extended bull markets like the 1982-2000 bull market. For instance, the 1949-1966 bull market was followed by a 16 year trading range from 1966 to 1982. Similarly, the 8 year bull market of the1920's was followed by a 13 or 20 year trading range (depending on how you measure it).

What happens in these instances is that during the trading range the market gradually moves from a very over-valued condition to a very under-valued condition. This takes a lot of time, but at each successive bear market low within the trading range you can see price-earnings ratios lower than at the preceding bear market low and dividend yields higher.

So far within the current range there have been two bear market lows - one in 2002 and the second in 2009. At the 2009 low the Dow and the S&P were definitely under-valued by standard measures but not nearly so much as in 1982 or in 1949. This is one reason why I think that there will be at least one more bear market of consequence before the major averages move out of the current trading range to the upside in a decisive way. In the mean time I think the obvious spot to be watching for a bull market top and the start of the next bear market is in the vicinity of the 2000 and 2007 tops (red dash lines). These tops were at 1553 and 1576 respectively, so the S&P has about 8% to go on the upside before reaching them.

A break below the green dash trend line would probably meant that the next bear market is underway.

When might a low comparable to 1982 or 1949 develop? Answers to such timing questions cannot be more than educated guesses. The 1949 low occurred 20 years after the 1929 top. That makes 2020 one reasonable guess for the final bear market low of the  trading. It is worth noting that George Lindsay's 12 year period from major high to major low ends in 2019-2020 if counted from the 2007 top. On the other hand, the 1982 low occurred 16 years after the 1966 top. That makes 2016 a second guess. That year is 12 years from the 2004 intermediate term top which was followed by a multi-month correction so there is a Lindsay time period pointing to a low in 2016 too.

No matter how you look at it - valuations or timing - the odds are that there will be at least one more bear market before this long trading range ends and probably two more. So long term investors should be watching the market carefully as it moves toward the red dash lines on the chart above for signs that the current bull market is about to end.


E said...

Thanks for your insightful analysis.

Any thoughts on the consequences of restructuring capital gains tax?

pimaCanyon said...

Great post, Carl.

I notice that you use linear scale on the chart. Have you found linear scale to be more reliable than log scale for charts that have large price differences as this one does?

Graph1159 said...

Very good analysis. And if the market rallies through the 2007 highs, the current bull market may be Wave D of a broadening triangle that began in 2000. I can imagine the S&P hitting 1600 in 2013 or 2014 and then crashing back to the 2009 lows later in the decade decade given all of the long term economic dangers.

For the short-to-intermediate term, I think that the bull market is in tact, but I expect a 15-20% correction to begin any day now.

tmf said...

I don't think you can use the same amount of years as we move into the future. Technology has sped up the cycles. The Great Depression was 25 year bear. The 66-82 was 16. That is a reduction of about 30%. Since around 1980 the computer got going so its safe to assume that there should be another reduction in the cycle by 30%. Guess what? It's 12/13. 2012-2013. Everyone sees the same pattern. That's why it could just keep going having everyone scratching thief head b c the news is "so bad"....

isitso said...

It is not uncommon for the market to retrace all the bubble phase and even more.

This would mean the range similar to 1966-82 scenario that everyone expects to unfold might be too optimistic.

Indeed, from a trader's perspective, it not productive to expect a fall to at least 400 on the SPX but it is something that should be kept in mind.