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A bullish chart?

A 100-year chart of the S&P 500 suggests that a potential multiyear rally may be forming.

  • Fidelity Active Trader News
  • – 09/25/2013
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For all the talk of rising rates, Syria, and slower emerging-market growth, traders generally appear bullish about the momentum behind stocks. That sentiment may be warranted, based on a 100-year chart of the S&P 500® Index, which suggests that stocks could be gearing up for another multiyear rally.

Time matters

Charts with different timeframes can tell very dissimilar stories. This is why it’s so important to look at multiple timeframes when doing your charting analysis. Consider the charts below, each one of which is a chart of the S&P 500® Index. The only difference is the time window.

The top left chart goes back 32 years. The predominant trend for this chart is clearly up, with several large corrections interspersed. A five year chart (top right) is a much different picture. The beginning of the chart is decidedly bearish (the tail end of the financial crisis), followed by a mostly increasing uptrend.

A year-to-date chart (bottom left) shows an upward sloping graph, which is logical given that the S&P 500 is up a staggering 23% over that period of time. Finally, a three-month chart (bottom right) tells a different story compared with all the others—and shows that stocks have been predominantly volatile: falling, then rising, then falling, and rising again.

Here’s the point: Different time frames tell different stories, and the conclusions you can draw will be biased if you are only looking at one. “You’ve got to be able to switch time frames and look at the long-term and the short-term,” says David Keller, CMT, president of the Market Technicians Association and managing director of technical research at Fidelity. “The worst thing you can do when analyzing the market is to look at a daily chart and that’s it.”

There are no hard-and-fast rules when it comes to deciding what time periods to use when constructing your charts. In fact, the time periods can differ dramatically, depending on your strategy. “If you’re a short-term investor, you could go shorter than a daily chart,” Keller points out. But even this type of strategy can benefit from an analysis of longer-term trends.

Long-term chart suggests possible end of secular bear market

Why might stocks be ready for another bull run? Consider the S&P 500® Index chart below that goes back several decades. Here, you can see extended multiyear trends where the pattern has been a long uptrend, followed by a long sideways trend, and then a rally. According to Keller, “This cycle started in the early 1930s after the Great Depression, then there were the rallies during the 1950s and 1960s, followed by a consolidation in the 1970s. Then, out of the 1982 low there was a great secular bull market until 1998.”

The most recent cycle using this pattern, from a technical perspective, is a sideways trend beginning in early 2000. “We’ve been in this secular bear market for about 13 to 15 years,” Keller says. “At this point, we may be getting close to the time where you could expect the next secular bull market.”

What would indicate that stocks are entering another long-term uptrend, similar to the previous rallies of the 1950s, 1960s, 1980s, and 1990s? “What we’re looking for is a break to new highs, especially at the stock level,” Keller says. In this scenario, stocks at the individual level would broadly be making higher highs and higher lows.

Time not just for charts

Factoring in time frame is significant for more than charts. It can be critical when evaluating data trends. For instance, the stock market corrected about 4.5% in August 2013, a relatively significant amount over the short term. However, this may not be indicative of a new bearish trend, especially when viewed from a long-term perspective.

On average, the S&P 500 has pulled back by 5% three times per year (see the chart right). Volatility of this nature is certainly something that can affect returns. Nevertheless, an investor who is looking only at monthly performance may get whipsawed into thinking a new bearish trend has begun when historical data suggest this could be a normal market gyration.

Monthly market data performance is an oft-cited statistic, yet investors should be careful about placing too much weight in these metrics. For example, September tends to be the worst-performing month for U.S. stocks. Enacting trades based only on this data is risky without assessing longer-term trends, in addition to other fundamental factors. In years that have exhibited strong equity market performance from January to September, as this market has, both the month of September and the September to year-end performance have typically been much stronger (see the chart below).

This illustrates how looking at multiple time frames can provide needed color to your analysis. And, in fact, stocks this month have thus far followed the longer-term seasonal trend, where September’s performance might more closely follow the performance of the preceding months. To wit, stocks have recouped all the losses from August 2013 and are up nearly 5% for the month, as of September 23, 2013.

Investing implications

A picture is worth a thousand words, particularly when it comes to stock charts. When analyzing stocks using charts, the trends and conclusions that may seem evident over the course of one time frame can appear quite different in another.

At the conclusion of August 2013, the prospect of rising yields and Fed tapering stalled the market’s momentum that has seen stocks gain 23% on a total return basis year to date. Thus far in September 2013, the bulls have roared back, and based on the trends that can be identified in a 100-year chart of the S&P 500, they may be here to stay for several years.

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