Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Long-Term Chart on S&P 500 Looks Just Plain Scary

Wednesday, December 19th, 2012
By for Profit Confidential

mitchell_clark_191212If you’ve heard the old stock market adage “Sell in May, and go away,” you might consider 2012 as being the perfect year to represent this trend. The S&P 500 had a strong start to the year, appreciating to over 1,400 from 1,250. At the beginning of May, the S&P 500 broke down considerably, giving up almost all of its gain for the year, only to significantly reaccelerate until mid-October. The stock market has definitely been uninspiring over the last few years, but you can’t argue that it hasn’t gone up over time.

From my perspective, we’re still in a long-term bear market, simply because the stock market hasn’t been able to surpass its previous highs. But using the S&P 500 as the benchmark, if you eliminate the huge technology bubble created in the five years before 2000 and the big dip of the subprime mortgage crisis, you still have a stock market that’s gone up tremendously. It’s the volatility over the last 15 years that’s been the big story, and it has scared away a lot of investors.

There are two things the stock market has in its favor going forward over the short term. Firstly, it’s reasonably priced. The S&P 500 is running below its historical valuation, and this has been a real cushion for the stock market this year. Secondly, we have very low interest rates and an accommodative Federal Reserve. In spite of flat earnings, the interest rate cycle favors stocks, and the S&P 500, combined with the generally fair valuations, can still tick higher in 2013 on an expansion of earnings multiples.

The one thing I don’t like about the S&P 500’s long-term chart is how ominous it looks, with the right shoulder formation now almost complete. Looking at the chart of the S&P 500 makes you think that the stock market is ready to collapse (which is possible), if only to bring stocks more in-line with their historical performance. (See “Two Great Stocks Worth Considering When They’re Down.”) Pull up a 30-year chart on the S&P 500, and you’ll see what I mean.

Two things could make the stock market experience a major crisis over the near term, and that would be the sovereign debt crisis and war. There is still a lot of vulnerability to the euro currency as member countries continue to grapple with high unemployment and massive government debt. The U.S. is vulnerable, but more so due to the lack of political will to effect policy regarding the deficit, the debt ceiling, and government spending. As has been proven in Europe, inaction is just as bad as poor policy choices.

It’s still going to be low and slow for the U.S. economy in 2013. Taxes are going up for many groups and income growth will be lethargic. Real economic growth can only be modest, with Europe in recession and China not accelerating. It’s unlikely that we’ll see the stock market collapse without a major event or shock to precipitate it. The S&P 500 is currently in consolidation mode and will likely be range-bound until fourth-quarter earnings season begins. Stocks are more apt to tick higher in the first quarter of 2013, then it might just be a good time to sell in May and go away.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles