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Weekend Stock Market Analysis

(10/17/09)

The major averages are approaching longer term resistance areas as they trace out an ABC corrective rally from the March lows.   The Dow's next significant area of resistance is near 10300 (blue line) which is the 50% Retrace calculated from the October 2007 high to the March 2009 low.

The Nasdaq's next area of long term resistance is at the 61.8% Retrace near 2250 (blue line) calculated from the October 2007 high to the March 2009.

Meanwhile the Nasdaq 100 is already approaching it's 61.8% Retrace near 1772 (blue line) calculated from the October 2007 high to the November 2008 low.

Finally the S&P 500's next area of longer term resistance is at the 50% Retrace of 1121 (blue line) calculated from the October 2007 high to the March 2009 low.  In addition also notice its downward trend line (black line) from the October 2007 high also comes into play near the 1121 area as well.

Once again many are saying the Bear Market is done and the next Bull Market has begun.   However based on historical data by Robert Shiller the PE Ratio for the S&P Composite has not reached a level where previous Secular Bear Market bottoms have occurred.  In the chart below historically the PE Ratio has dropped to 7.0 or below (points D) before a Secular Bear Market bottom has developed.   This was the case in the early 1920's, early 1930's and in the early 1980's.   So far the lowest PE Ratio, in this current Secular Bear Market, based on Shiller's data has been just above the 13.0 level (point E).   As I pointed out last week previous Secular Bear Markets have been elongated affairs that have lasted anywhere from 15 to 20 years.   Also the overall pattern so far resembles the 1906-1921 and 1966-1982 Secular Bear Markets versus the 1930-1949 time period which formed a large "ABCDE" Triangle pattern before breaking out in the early 1950's.   

The rally from the March low has been impressive however as pointed out above it's no different than what has occurred in previous Secular Bear Markets.   The chart below is the Dow Adjusted for Inflation for the period from 1965 through the early 1980's.   Notice there were "3" sharp oversold rallies (points F to G) that lasted from 11 to 32 months however the overall trend remained downward until the bottom occurred in 1982.

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