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Amateur Investors Weekend Stock Market Analysis (1/9/10)

http://www.amateur-investor.net/Weekend_Market_Analysis_Jan_9_10.htm

I thought this weekend I would go back an revisit historical PE Ratios versus the Inflation Adjusted S&P 500 Composite as derived by Robert Shiller's data. The first thing I would like to point out is that, based on Shiller's data, previous Secular Bear Market bottoms using an Inflation Adjusted S&P Composite Chart haven't occurred until the PE Ratio has dropped to 7 or below which happened in 1982 (point A), 1932 (point B) and way back in 1921 (point C). So far, since the current Secular Bear Market began in 2000, the lowest PE Ratio has been around 13 which occurred with the March 2009 low (point D). Thus from a historically perspective so far the PE Ratio hasn't reached a low enough level for a Secular Bear Market Low to occur using Inflation Adjusted Charts so we shall see if history ends up repeating itself in the long run.



Meanwhile another thing to notice is that the current Inflation Adjusted S&P Composite chart is acting similar to previous Secular Bear Markets that occurred from the mid 1960's through the early 1980's and further back from from 1906 through 1921 (defined by the purple rectangles). On the other hand the Secular Bear Market that occurred in the 1930's and 1940's was characterized by a steep sell off over a short period of time which developed into a longer term "ABCDE" Triangle pattern. As you can see it doesn't appear this type of pattern is developing.



Next as you can see since the mid 1890's there have been a series of Secular Bear and Bull Markets. No doubt once the current Secular Bear Market does end this will be followed by another Secular Bull Market at some point later this decade into the 2020's if the pattern continues like it has for the last 113 years. Furthermore if the current Secular Bear Market acts similar in time to the previous ones from 1966 through 1982 and 1906 to 1921 then we would remain in this current Bearish Cycle for possibly another 5 to 7 years.



Of course when you compare the Inflation Adjusted Chart to a Non Inflation Adjusted Chart things appear to look better than they are as shown below. After the last sell off from 2000 through 2002 (points F to G) the S&P 500 rallied over the next 5 years and made a slightly higher high by late 2007 (points G to H) on a Non Inflation Adjusted Chart. However the Inflation Adjusted Chart never got even close to the previous high made in 2000 (point I) which was then followed by another massive sell off from late 2007 into early 2009 with a lower low being made in both charts (points J).

Finally many people are probably wondering why the S&P made a low in March of 2009. Notice the previous high made in 1968 (point K) corresponded to the low made in March of 2009 when using Inflation Adjusted values. Personally I don't think this bounce off of the 1968 high happened by accident.