If history is any guide, the S&P 500 Index is heading for new highs early next year. That is according to Thomas J. Lee, the chief U.S. equity strategist for JPMorgan (via Bloomberg’s Chart of the Day).
Lee looked at the 10 worst bear markets since the 1920s, and found that the median downturn was ~20 months. At 23 months, the 2007-09 collapse was fairly typical of this group.
Here’s where things get interesting: Lee observed that 888.62-point, 23 month retreat from October 2007 to March 2009 has now recovered 75% of those losses (See above chart). His historical analysis suggest that the remaining 25%, if this cyclical bull is average, will be recouped over the next 10 months. This pattern suggests the 2007-2009 plunge may completely erased by early 2012. To play this rebound, his favorite sectors are financials, industrials and technology.
I am not sure if I agree with this, but I nonetheless found this analysis intriguing. Indeed, my immediate reaction was to recoil from it. However, I have learned from my own trading history that when I have a visceral reaction against something, it is my limbic brain, rather than my frontal cortex, doing the “thinking.” That reaction is likely typical of most traders, and therefor worth considering the opposite — that the negative reaction is worth exploring, and perhaps Lee’s technical take might ultimately be right — even if the Macro perspective is far worse . . .
S&P 500 Record Is Months Away, History Shows: Chart of the Day
Bloomberg, April 29 2011