Sunday, November 23, 2008

Stock Market S&P 500 Long Term Bottom Target: 450 to 600, a Drop of 25% to 44% from Here

Previously, we offered analysis that the US Stock Market could be in trouble if the S&P 500 goes below 768.

The S&P 500 recently went to an intraday level of 741 but successfully tested the major low of 768 set 6 years ago on October 10, 2002.

It is still very possible that the S&P 500 could re-test (at least once) 741/768, and the S&P 500 could break below this level.

At this point, where would a potential long term bottom be?

In the Dire Consequences if S&P 500 goes below 768 post, we hinted that a long term bottom might be reached around the S&P 500 level of around 500.

The Long Term bottom could be around 450 to 600 on the S&P 500 over the next several years, a drop of around 25% to 44% from here (S&P 500 Level of 800).


A. No Major Support Until Around S&P 500 level of 450 to 500.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

The S&P 500 Level in late 1994 right before the S&P 500 rocketed upwards at an unsustainable rate is around 450.

This sets up the lower end of the long term bottom range of 450 to 500 on the S&P 500.

B. Reverting Back to 60 Year Trend Line Suggests Level around 400-500



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 450 to 500, which coincides with the predicted long term support level above.

C. Five Month Fibonacci Grid Suggests Bottom of 600



When we look at the five month chart, we place a Fibonacci Grid and align the top to a recent high (of around 1265), and align the 61.8% and 38.2% line to coincide with the recent trading range between 850 and 1010. The lower range of the Fibonacci Grid suggests a potential bottom.

This S&P 500 level is 600, setting the upper range of a longer term S&P 500 Bottom.

D. 60 Year Fibonacci Retracement: 50% = 770; 38.2% = 588

Early in 1950, the S&P 500 was around 17. At the top of the market, the S&P 500 reached around 1560.

If we use the Fibonacci Retracement Rule of 50%, that would lead to the S&P 500 Retracement of 770, which coincides with the recent major bottom of 768 that was achieved October 10, 2002, and very recently.

If we use the Fibonacci Retracement Rule of 38.2%, that would lead to the S&P 500 Retracement of 588, which is within the 450-600 range using previous methods of analysis.

E. Chartist Louise Yamada Opinion: 400 to 600

On a recent CNBC Fast Money episode, Chartists Louise Yamada predicted an S&P 500 bottom of 400 to 600. This coincides with the analysis so far.

F. Secular Bear Market, Cyclical Bull Market

Television Personal Financial Advisor Suze Orman predicted in 2004 that in 2000, we started a Secular Bear Market (long term Bear Market of around fifteen years), and around 2003, we started a cyclical Bull market (short term market lasting around two to four years), that would eventually end, and hit near the lows of 2002.

Her prediction was accurate.

If her prediction continues, we will continue the Bear Market until around the year 2015 or so.

G. Major Demographic Shift Ahead

In 2010, there will be a major demographic shift as the first Baby Boomers reach 65 years of age, and may retire and take more money out of the stock market. More Baby Boomers will do the same in the years following 2010.

This may put pressure on the U.S. stock market and may be in line with the long term Secular Bear Market theory starting in 2000 and ending around 2015.

Five Month S&P 500 Stock Chart

Sixteen Year S&P 500 Chart

3 comments:

Anonymous said...

Do you know where I could find the average long term growth of the S&P 500?

techfarmer said...

Good question.

There are many ways to look at return. These numbers could vary based on what period you are examining, whether you reinvest dividends, or adjust for inflation.

I've seen numbers between 7% to 10% on the S&P 500.

You can find different results around the web.

On this blog, I have information from 1960 to 2007.


Here's another one ( without dividends reinvested) from 1950 to 2007.

Fred Voetsch said...

You can get all sorts of historical data on the S&P 500 at http://tinyurl.com/5m8q2f

Make sure you're looking at the rigth data and that you are apply it correctly.

--Fred