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Weekend Stock Market Analysis

(7/11/15)

Last Sunday people in Greece voted down a proposal by Europe to bail out their country.  This is then followed a few days later with the leader of Greece (who by the way voted no as well) turning around and screwing his own people by basically agreeing to the original European proposal anyway.   Meanwhile in China its market rose nearly 160% in a year which was recently followed by a 35% drop in just 3 1/2 weeks.  Of course nobody in the Chinese Government gave a damn when its market was in a parabolic move higher and people were buying stocks like crazy by borrowing money.  However when it dropped 35% then they issue orders that mutual funds can't sell stocks and to arrest people who were shorting their market.  

I don't know when things are going to unravel in the rest of the world including our market but history suggests it will at some point.  A chart of the Monthly S&P Composite adjusted in Real Dollars plotted on a log scale is shown below.  Next if we add a Regression Line (green) and plot the upper and lower boundaries this makes a nice long term upward channel.  The Red Line is 100% above the Regression Line while the Blue Line is 50% below the Regression Line.    

As you can see historically it's been very rare for the S&P Composite in Real Dollars to rise above (points A) or below (points B) its long term upward channel.  However since 2000 the S&P Composite has risen back to or above its upper channel three times in the past 15 years.

Meanwhile as I have pointed out in the past when the S&P Composite has risen back to the top or above its upper channel substantial corrections have eventually followed (60% or more) with a drop back below the Regression Line at some point  (points C to D).  Right now the Regression Line is just above the 1000 level so that would be a 50% drop from current levels if a similar event develops in the longer term.      

Finally I don't expect things will unravel until after the end of the year.  Notice every year ending in the number "5" has had a positive return since 1885.  Thus I expect they will keep things propped up through the end of the year to keep this streak intact.

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