Déjà vu All Over Again: Is the S&P 500 Stuck In A Sideways Trading Pattern?

“Maybe God isn’t omnipotent. Maybe he’s just been around so long, he knows everything.”

For those who may be familiar with the movie, the above quote comes from Bill Murray’s character Phil Connors in Groundhog Day. For those who are not familiar with the movie, it is about a weatherman (a rather not nice character at first) who is given an opportunity to relive one day in his life over and over again until he finally learns to better himself — and, eventually find love. During one scene in the movie, an exasperated Phil Connors exclaims to his love interest (portrayed by Andie MacDowell) that “Maybe God isn’t…” Essentially, the scene is a take on the old adage that history repeats itself and that if you live long enough you will be able to predict the future.

While catching-up on some reading this past weekend, I discovered a situation which brought the thought of history repeating itself — and the movie — to mind. On a personal level, I do not believe that history repeats itself; rather, I believe in Mark Twain’s philosophy that: “History doesn’t repeat itself, but it does rhyme.”







If we look at the above series of graphics we see snapshots of the S&P 500 chart patterns from January 2nd 1966 to January 2nd 1982 and from January 2nd 1997 to January 2nd 2013. As can be seen, the patterns are very similar in nature and, more interestingly, both represent a sixteen year “sideways” trading pattern for the S&P 500 Index.





Redraw the charts and what do we see — a hopeful sign? Maybe, and maybe not. The date ranges for the above charts are January 2nd 1982 to January 2nd 1988, and January 2nd 1997 to the present day (i.e. June 3rd 2013 for the lower chart). As can be seen in the above chart, the U.S. was in a recession in 1982 and the S&P 500 was trending down until around the beginning of the third quarter of that year when it took-off, steadily climbing until the middle of 1983 when it started to, again, move sideways. It then enjoyed a very nice run until the third quarter of 1987 when it took a nose dive during the Crash of 1987.

When we look at the next chart we see that the S&P 500 has just broken above resistance at 1,576.09, the high reached on 10/11/2007, just before the housing market collapsed. So what does this information tell us? Is the “recovery” here to stay? Again, maybe — and maybe not. We must keep in mind that the sideways trading pattern that occurred between 1966 to 1982 occurred during much different times. During that time period, the Fed was, for the most part, focused on fighting inflation; today, however, it is embroiled in a bitter battle to defeat deflationary forces. Okay, I know I’m in trouble with that statement, but bear with me as I make my case.

For quite some time now it would seem as though nothing is going down in price, everything appears to be going up in price — right? Fuel costs are up, food prices are up, housing prices are up — so where are the deflationary forces? “Inflation is always and everywhere…”  — correct? Yes, all are true but, sadly much of the recent inflation we’ve seen has been artificially manufactured by the Fed with its “easy money policies.” Remember, inflation is caused by:

Demand-Pull Inflation – This theory can be summarized as “too much money chasing too few goods”. In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation – When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

BUT, inflation also can be caused by a weak currency, which is exactly what the Fed has produced with its Quantitative Eradication of the Purchasing Power of Money or QEPPM for short.

If we calculate the time value of money from 1900 to 2012 we see that it would now take ~$28.20 to purchase an item that would have cost $1.00 in 1900. In more recent historic terms, it would cost ~$1.33 to purchase an item that would have cost $1.00 in 2000 — that’s 33% more money to purchase the same item that could have been purchased for $1.00 a relatively short 12.5 years ago!

Recessions are meant to purge the system so that the economy can start anew. In the same way that your car’s cooling system needs to be flushed periodically so that it can continue to cool your car’s engine in a clean and efficient manner, the economy needs to be flushed-out periodically so that it can work more efficiently. The problem, however, is that the Fed does not wish to have the system flushed; rather, the Fed prefers that the economic engine experience no downtime and, alternatively, the Fed launches into a campaign to keep the engine running, regardless of the costs, whenever it begins to spit and sputter. Instead of investing in a good maintenance program, the Fed would prefer to keep things humming along until one day the whole thing simply blows-up.

That said, we are in some very strange times, indeed. With interest rates at historic lows, and with the Fed quickly running our of parlor tricks, the next recession could very well turn into the mother of all recessions. The Fed has effectively painted itself into a corner (with us along for the ride). It has forced many astute and conservative investors into riskier assets, and it has ensured higher unemployment levels for younger generations of people, given that most retirement-aged workers can no longer afford to retire. And the changes are here to stay. With our national debt quickly approaching $17 trillion, low interest rates and “easy money policies” are here to stay. Since the U.S. Government can not afford to pay its debt at higher interest rates, with a deflated currency, the Fed has little choice but to “keep interest rates low for an extended period of time.”

Bottom Line: Though there are some people (maybe more than just a few) who believe that the stock market will end 2013 on a high  note because of the “January Effect,” risky assets (i.e. stocks) are due for a correction (and, possibly, a large correction at that). Regardless of the Feds actions, the market will, eventually, correct itself; and, until such time, enjoy the party while it lasts. Just be certain to stand near a door or window so that you can quickly exit when the music stops playing.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)
This entry was posted in Articles, Fundamentals and tagged , , , , , . Bookmark the permalink. Trackbacks are closed, but you can post a comment.
  • StatCounter

    wordpress blog stats

Check Out What’s New at The Tenacious Trader by Going Here