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A special report brought to you by the PRS Stock Report
The Breakout
Ahead 7/11/2007
Once the S&P 500 pushes through the
2000 highs we expect a powerful surge higher.
Target for the S&P 500: above 1625
In early June long-term interest rates
snapped sharply higher reaching levels not seen in over a year.
The sudden surge in long rates tripped up the stock market
sending the Dow and S&P 500 into a sharp and rapid 3% decline.
The correction was powerful enough to awaken a few hibernating
bears and suddenly the headlines were full of doom and gloom.
Don’t buy into the doom or the gloom.
While the decline was sharp, it was brief.
On June 8th the lows were in place and within a few
days the indices were just off their recent highs. For the Dow
that means it was just off its all time highs while the S&P 500
remains just below its all time high of 1552, which was set in
2000, over seven years ago.
When
people see that the S&P 500 is back near its 2000 all time
highs, for some reason that seems to make investors nervous. It
is kind of like pushing through the sound barrier. On October
14, 1947, as Chuck Yeager accelerated the X-1 past Mach 0.9, he
had his hands full. The plane was bucking and shaking all over
the place. Apparently that’s what happens as an airplane
approaches Mach 1.0, the speed of sound. Going that fast isn’t
a big deal today, but on October 14, 1947 before the sound
barrier has been broken, all that turbulence had to have been a
bit unsettling to say the lease.
On that day it didn’t really matter. If it was possible, Chuck
Yeager was going to ride the X-1 into history and push past the
resistance barrier known as Mach 1.0. It was a bumpy ride and
he made it. Today fighter jets routinely push through the
resistance barrier. There is always some shaking and rattling
along the way, but they get through it without worry because
pilots know what to expect.
When it comes to the stock market, pushing
through major resistance barriers, like important old highs, is
often like pushing through the sound barrier for the first
time. In a sense, we don’t really know if it can be done.
Because of this uncertainty, folks tend to get a bit paranoid
and the price action often gets a little bumpy along the way to
new high ground. You can see in the chart above how this
happened with the Dow in 2006 when it worked through its 2000
high. Once clear of the old high the Dow sailed higher,
surprising many with each new high.
The Dow’s recent action is an excellent
example of what we expect with the S&P 500. Fortunately, we
have a lot of history on which to compare our expectations.
When using history as a guide, I always hear someone say, it is
different this time. Are things different this time around? Yes
and No. The details of current concerns will always be
different than way back whenever. However, as long as people
remain determined to overcome challenges, the common thread of
the solution will remain remarkably similar too.
Today we are concerned about War, energy
prices, inflation, and political unrest (at home and abroad.)
The details are always different but over the course of time,
these are often the major concerns of the day, only with
different details.
Fortunately, Capitalism is still capitalism.
The problems may be different, but American determination to
solve the problems and create a better life for ourselves and
those around us remains constant. The events at hand can
discourage people for a brief time, but we don’t give up. We
find new voice and foundations on which to build. In the end we
come up with new ideas and ways to improve and move forward.
This has been happening for seven long years and the S&P 500 is
ready to push on to new high ground.
American resolve and determination remain
the universal constant through out history. While the details
of the concerns are often quite different from crisis to
crisis, the determination to succeed has remained a constant
anchor through out history. And it is because of this anchor
point that history provides us with an excellent guide as we
look forward.
The S&P 500 reached its high in 2000 and has
been in place for an important seven long years. During that
time companies have been working hard to improve. Companies
have grown their sales and their earnings significantly over
the past seven years yet the value of it all is only now
nearing its valuation in 2000. It is time to put a higher
valuation on them and history says that is going to happen.
Here is why. For the past 100 years, with
only one exception, every time a major index approached a
previous high, more than five years old, it pushed right on
though to measurably higher levels. We can see this in the
chart above which shows the Dow from 1915 to present. In 1919
the Dow slightly exceeded the 1917 high, but that only 2 years
after the high was reached. Notice that in 1924, seven years
after the 1917 high, the Dow easily worked to significantly
higher levels.
The 1929 high was easily surpassed in 1955.
The highs reached in 1937 were surpassed in 1946 while lower
highs reached in 1939 were easily surpassed in 1945. The 1987
high was cleared with ease in 1990, but the first gulf war
stalled the advance for a year. In 1982 the Dow finally smashed
through the highs reached in 1976 and 1981.
There is one lone exception. In 1966 the Dow
peaked just below 1,000. Three years later it attempted to push
higher in 1969 and failed, but that was only three years later.
In early 1973, seven years later, the stage was set for prices
to breakout to the upside. Everything was set for a push
higher; however, the World was stifled by the Arab Oil Embargo,
which brought the US economy and a good portion of the world
economies to a screeching halt. With that tectonic event, the
Dow failed to follow the historical precedent. While it took
another seven years, it is worth mentioning that the delayed
upside move was followed by one of the largest bull moves on
record.
The S&P 500 follows a similar pattern.
However, in 1973, the S&P 500 did push to a minor higher high
before the global economic conditions pulled it back in.
The lessons of history paint a bullish
picture despite the news headlines. Today’s stories are filled
with reasons to worry and uncertainty. In short, the media is
doing a great job of drawing in more viewers. At the same time,
the S&P 500 churning just below its seven year old high. Baring
a major world event, similar in scope as the 1973 Arab Oil
Embargo, the S&P 500 should push through the seven year old
high in the weeks ahead. Like pushing through the sound
barrier, the closer the S&P 500 gets to its all time high, the
bumpier the ride is likely to become. Once clear of the
barrier, the ride should smooth out rather quickly as prices
coast higher.
I wish you all the best in your trading and
investing endeavors
Jim Patterson
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