The inventory market has declined over 40% because it reached the height in October 2007. The S & P 500 index reached a excessive of 1,561.80 and over a 12 months later has been buying and selling within the 800 to 900 vary. Does this imply the correction is over and we will now search for a brand new bull market to happen in 2009? We predict it’s unlikely. Why?
First, the market shaped the left facet of a parabolic sample because the market basically went straight up from 1982 to 2000. Even the 1987 crash now appears to be like like a blip on a bubble formation.
In 1982 the index was at 103.71. Over the following 18 years it elevated to 1,527.46. In different phrases the S & P 500 index elevated by 1,500% in 18 years.
Beginning in 2000 we had a pointy three 12 months correction that sliced the good points over the past 18 years virtually in half because the low on the S & P 500 index was 800.58. Then the market moved to a marginal new excessive at 1,561.80 over the following four years.
So to summarize we shaped an ominous double high formation over a interval of about 7 years. Since then in 2008 the market has began transferring down once more.
A lot of these double high patterns over lengthy intervals of time after a parabolic rise are very highly effective chart patterns that sign a lot decrease costs forward. And after I say a lot decrease, I imply a lot decrease. It’s not nice to say how one of these sample typically performs out, however right here it’s. The primary actual bounce can be anticipated down within the 800 space the place the final correction ended. And within the latter a part of 2008 that’s precisely what has occurred.
However I might not anticipate it to carry there for lengthy. After that the following actual maintain space can be within the 450 space, however there is no such thing as a assure it’ll even cease there. Even when it does we¡¯re most likely in a despair or a minimum of a painful recession.
Take into account that is an index of 500 shares and a few of them have earnings for now so I might not anticipate it to be as extreme as a few of the dot com shares in 2000 that had been taken to the moon on merely an expectation of earnings earlier than the bubble burst. For instance, YHOO topped out at round 200 and earlier than it was over the inventory was buying and selling under 10 a few years later.
Nonetheless, hold one factor in thoughts about earnings. If we go into a really severe recession or despair within the economic system many of those firms may have adverse earnings … in different phrases they are going to be dropping cash.
Backside Line: The double high formation won’t be damaged except the S & P 500 goes again above the previous excessive of 1,561. This appears to be like extraordinarily unbelievably within the subsequent 12 months. I feel the extra doubtless state of affairs is that the market strikes decrease and sooner or later in 2009 the S & P 500 index dips under 500. The Federal Reserve and Congress are throwing trillions on the economic system in hopes that we’ll avert a severe recession or despair. At this level I feel the percentages nonetheless favor a severe market and financial downturn since their heroic efforts to cease this ugly state of affairs from unfolding. Solely time will inform whether or not they are going to be profitable, however I’ve my doubts with out and till I see encouraging indicators within the economic system. Till then the inventory market is on shaky floor and topic to sudden and violent down days that may wipe out all these making an attempt to choose the underside on this market presently earlier than the ultimate backside is reached at a lot decrease ranges.