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Weekend Stock Market Analysis

(6/29/13)

The chart below shows Corporate Earnings in the S&P Composite from 1871 to present (red line) versus the S&P Composite (blue line).  The rebound in Corporate Earnings after the massive drop in 2008 is similar to what occurred back in the early 1900's.  Back then Corporate Earnings crashed after World War I ended (points A to B) however this was then followed by a sharp rebound in the 1920's (points B to C).  This lead to the Roaring 20's along with a substantial rally in the S&P Composite through 1929.  However they quickly found out in the early 1930's Newton's Law of Gravity would come into play as the rapid spike upward in Corporate Earnings was not sustainable.  This lead to another drop in Earnings (points C to D) which coincided with the early 1930's market crash.   

Meanwhile the current turnaround in Corporate Earnings since 2009 is even more parabolic than what occurred in the 1920's.  It's obvious the current trend in Corporate Earnings isn't sustainable and a pullback will follow.   The question is how deep will the pullback be and what affect it will have on the market?   As you can see there is a longer term trend line (black line) connecting prior bottoms in Earnings (neglecting the big drop in 2008) so this would be a possible target (point E).  Furthermore the S&P Composite also has a longer term upward trend line (brown line) dating back to the early 1930's which would intersect the trend line connecting the 2002 and 2009 lows (green line) just below the prior 2009 low (point F).     

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