Friday, March 07, 2008

S&P 1500: A long-term upper limit?

The stock market is powered by emotional, flawed, and irrational human beings, and prices are not as logical as some might wish to believe. One of the best examples of this irrationality is that it took more than 16 years and five bear/bull cycles for the Dow Jones Industrial Average to decisively cross the four-figure threshold of 1000. The Dow 30 reached 1000 for the very first time in January 1966, but it wasn't until November 1982 that it first passed above 1050. In the intervening one and a half decades, the Dow fell to the 600-800 range and returned to the 990's five times.

There was nothing special about Dow 1000 financially or economically. Corporate earnings grew throughout the stretch of 1966-1982, so Dow 1000 did not represent a particular P/E ratio - it would have made just as much sense for the market to have a limiting price of 900 or 1100. In addition, four of the companies in the Dow 30 were actually dropped from the index and replaced with new ones during that span, so the index didn't even measure the same thing over those 16+ years. It was obviously the psychologically important change from the 3-digit index level of 999 to the 4-digit level of 1000 that kept that barrier in place for all those years.

Today the S&P 500 is the more recognized measure of the market, and this index seems to have formed a long-term upper price limit around 1500. In 2000 the S&P made brief excursions above 1500 before succumbing to a bear market and falling to 776 by October 2002. The S&P then recovered by 2007, and spent several months passing above and below 1500. After reaching a high of 1565 in October, it now appears that the S&P 500 is retreating from 1500 for the second time. If the previous long-term market top from 1966-1982 is any indication, then it wouldn't be surprising to see the 1500 barrier remain in place until the middle of the next decade.


1 comment:

Dan said...

Regarding Brinkers newletter - my renewal is coming due.

At this point I am shying away from spending $185 for another year's subscripton.

Brinker has lost his "bearings". The more times he says buy and the market goes down the more I say no to spending $185s.