Found this on the Kahuna thread
History suggests S&P 500 is poised to rally
Surge usually follows tight trading range
By Adam Shell, USA TODAY
Frustrated by the stock market's inability to break out of its tight trading
range? Be patient. Historically, trading ranges are followed by explosive
rallies.
Since early spring, the Standard & Poor's 500 index has meandered,
making little headway. On March 31, the index closed at 1498.58. Late
Monday, 20-weeks later, it stood at 1499.20. In between, it traded as high
as 1516 and as low as 1357. Year-to-date the S&P 500 is up 1.5%.
Not exactly the gaudy gains investors have become accustomed to, after
five straight years of double-digit returns. But now's probably not the right
time to give up on stocks. An analysis of similar periods in which the S&P
500 remained relatively flat shows patient investors are eventually rewarded.
"This kind of market behavior is characteristic of the past two decades and
has consistently been resolved bullishly," says Bernie Schaeffer, chairman of
Schaeffer's Investment Research.
Two recent examples:
In 1999, the S&P 500 was trapped in a trading range between 1250 and
1400 from early April to the end of October. Its gain during the
seven-month pause: 0%. But after breaking through the 1400 barrier in
mid-November, the index jumped 18% before hitting its all-time high of
1527.46 on March 23.
Perhaps the best comparison to today's market stagnation dates back to
1994, says Hugh Johnson, strategist at First Albany. The S&P 500 went
nowhere between January 1994 and February 1995, a period in which the
Federal Reserve slowed the economy after hiking short-term interest rates
seven times. (Similarly, the Fed has boosted rates six times since June
1999.)
After the Fed ended its string of rate hikes, stocks went on a tear, surging
146% from mid-February 1995 to July 1998. It's upward march,
interrupted only by a three-month pause in 1996, was finally halted by the
Asian financial crisis.
A rally could happen again if the Fed ends its tightening cycle , says
Johnson. Wall Street would welcome a rally. In the past four months, the
S&P 500 has traded within 4.74% of its midpoint range, its narrowest range
in two years, says James Stack, president of InvesTech Research. The Dow
Jones industrials and Nasdaq composite have also been bogged down in
tight trading ranges for months.
Schaeffer blames market pauses on the demise of long, drawn-out bear
markets, such as the 1973-74 decline that knocked the S&P 500 down
42%. Today, he says, traders dump stocks in sectors of the market that are
not working and pile into rising sectors. The net effect: a flat market.
"Instead of collapsing and moving out of its long-term uptrend, the market
simply rests by moving sideways until its next uptrend," Schaeffer says.
usatoday.com |
