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(7/5/14)
The long term trend of the market has always been to the upside
as shown by the chart below which is the Inflation Adjusted Monthly S&P Composite since 1790. In addition I have added the exponential
regression line (green line) and drawn in the longer term upward channel. The upper end of
the channel which is 100% above the regression line is defined by the red line
while the lower end of the channel is 50% below the regression line as defined
by the blue line. Overall it has been very rare to see the
Inflation Adjusted S&P Composite near the upper or lower portion of its long
term channel in the past 225 years. In fact previously there have only been
"7" occurrences when the S&P Composite has been near or above the
upper part of the channel (points A). Currently the S&P
Composite is roughly 98% above its regression line so this would
make the "8" occurrence. Meanwhile on the other end of the
spectrum there have only been
"8" occurrences when the S&P Composite has been near or below the lower end of the
channel as well (points B).  So the question is
since the
S&P Composite is now back near the upper part of the channel what may
transpire over the next few years? In "5" out of the last
"7" events the S&P Composite stalled out near the upper end of the
boundary (red line) and then entered a corrective phase. These
corrections occurred from late 2007 through early 2009, late 1929 through 1932,
1906 through 1920, 1901 through 1903 and 1853 through 1859. Four of
the corrections were 58% or more while the other one was only 30%
(1901-1903).  Meanwhile the other two occurrences
saw the S&P Composite rise 150% above its exponential line of best fit
before a major top occurred. The last event was in the late 1990's
(point C) with the previous one too that way back in the early 1830's (point
D). Thus if the S&P Composite was to rise 150% above its
regression line that would yield a value around 2600 which is roughly 30% above
current levels. 
Finally even if
the
S&P 500 can rally up to the 2600 level which is 150% above the regression
line notice what occurred with the past two events in the late 1990's and early
1830's. Both of these events were followed by corrections (points E to F)
of 65% and 70% respectively over a period of 7 to 9 years. Thus even
though the first half of this decade has been a favorable one for investors the
latter half may not be as
kind. 
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