How depressive is the S&P 500?
I’m not going to put any coating on the index, it’s been quite a depressive start for the year 2008, when it comes to the S&P 500. The index managed to stay in a sideways trending pattern most of 2007, only to crash at the beginning of 2008. Of course there were some dips in 2007, but the index always managed to pick up some steam and lift into “safer” territory. But now it looks like the end, or that’s what we’re seeing on TV and in the news. The Feds had to step in and cut the rates in what looked more like a panic reaction than a calculated move of a long term plan. Everyone is screaming and it seems the markets next move would be to start hording canned food. It’s everyone for him self, no time for women and children first ideologies.
But how depressive is the S&P 500. From a short term reactionary point of view, it’s pretty bad. It’s been falling since new year and before that there were constant crises. We’re now looking at the index being 
at levels last seen in the middle of 2006, how depressive is that? I’ll tell you! It just sucks!
On the other hand, when you look at the S&P 500 from a long term point of view, a person buying stock in 1995, or even at the highest price before the market crashed in October 1987, would be quite profitable with their positions, even well above the average. Of course, a person buying stock at the height of the Tech bubble, and the tops of 2007, would be looking at losses. But we’ve still not reached the lows of 2002 and 2003.
If we look at the S&P 500 from 1983 to 1995, the index has been moving in a gradual upward movement with it swinging around a baseline, in a rather relaxed mode. The exception being 1987, where the index took a dive and in a short time crossed the line in an aggressive manner. But before the October 1987 crash, the market had increased its climb taking the index into a steeper movement. The following crash can easily be considered a 
possible depression, but when looking at the index, it lasted until 1991, with a small recovery in 1989 that lasted a short time. We can debate about the effect of 1987, if it was a depression or just recession, but the market stayed under what could be considered an expectable level.
In 1995 we begin to see a change in the index in relation to the average growth line. The market starts to move more aggressively upward until it takes on the form of the Tech bubble in the late 1990’s. This increase in the move, I can say with a rather firm certainty, was an abnormal move and the pullback in 2000 should be considered a market correction. If we project the average growth line from 1983, we can see that the Tech bubble correction ended well above the average growth line. This tells me that there was never a danger for the market, even if the drop from 2000 to 2003 was a big one. It was still with in the limit of the average growth from 1983. We all agree that the Tech bubble was an extreme move in the market and we should expect the correction to be in line with that.
When we look at the recovery after the Tech bubble crash, we can see that the recovery was not any less of a jump than the Tech bubble itself. It climbed well above the average growth line. So when it hit the top in 2007, incidentally the same level the Tech bubble hit, a correction was something we should have anticipated. This was not something that should have come out of the 
blue, for us it didn’t. When looking at the climb, we should be expecting an aggressive downward correction in the S&P 500, most likely towards the average growth line.
But what can we expect the future of the S&P 500 to be? If we look at the charts, the S&P 500 has been falling through a range without any substantial support areas. It hit the first one on the 22. of January, when it bounced up again after the Feds cut the interest rates. The next level to hit would be close to the 1200 level, but shortly afterwards we’re seeing the 1150 mark (A on the chart) as a possible end zone, or at least a sizeable support, as it coincides with the top before the correction in 1998. After that there is not much of a support until the 2002 to 2003 bottom. If we look further and take the average growth line into consideration, we could see this correction end in the later part of 2008, giving the drop to be in line with what we’ve had until now. Point B shows where the estimated crossing of the drop and the average growth line would cross, something that matches the support area of the 2002 to 2003 bottom. If the drop eases a bit and becomes similar to the climb, we could see point C as the end of the correction, culminating in late 2014. If, on the other hand the support at line A holds, we could see the correction lasting close to 2020. So if we take this further into the philosophy that considers the stock and commodity markets crossing each other in a 20 year cycles, this could fit with the end of the commodity cycle that is believed to have started around 2000.
What ever the result of this will be, I don’t see any serious economic problems or even catastrophes at hand unless the S&P 500 crosses the average growth line. Until then it can be considered a correction.
