With the recent melt down in global markets, it would be prudent to look back at historical data on the US market to see where we stand. To do this I look at major tops and bottoms in the S & P 500 obtained from weekly historical data from Yahoo Finance since 1950. The first table below shows major tops and bottoms in the S and P 500 relative to the average and standard deviation:

Table 1: S&P 500 Tops/Bottoms, Average & Standard Deviation over Time

Date	S & P 500 Top / Bottom	Average	Standard Deviation
November 25, 1968	108.37	55.37	24.92
May 18, 1970	72.25	58.26	26.21
January 2, 1973	119.87	62.90	28.12
September 30, 1974	62.34	65.38	28.78
December 22, 1980	136.57	72.26	29.69
August 2, 1982	103.71	74.74	31.00
August 17, 1987	335.9	90.93	53.55
30-Nov-87	223.92	92.37	55.95
13-Jul-98	1186.75	181.77	203.72
31-Aug-98	973.89	184.22	208.73
20-Mar-00	1527.46	218.64	282.52
2-Apr-01	1128.43	242.13	324.34
14-May-01	1291.96	244.38	327.45
10-Sep-01	965.8	250.33	334.93
11-Mar-02	1166.16	258.34	343.62
30-Sep-02	800.58	266.00	349.94
8-Oct-07	1561.8	346.50	427.52
2-Mar-09	683.38	366.81	443.71
19-Apr-10	1217.28	379.11	448.71
28-Jun-10	1022.58	381.39	449.82
2-May-11	1340.2	392.94	457.43
15-Aug-11	1123.53	397.09	460.40
13-Jul-15	2126.64	474.27	543.97

As can be seen in the table above on only one major bottom in 1974, the market tested it's long term average since 1950. We have not tested the average since 1974 for well over 40 years. The other interesting observation is that the standard deviation of the market has exceeded it's average since 1998 with the market way above its average. This coincides with the involvement of the FED in the market since 1998 post the Long Term Capital debacle and suggests that the risk in the market has increased significantly. The markets average since 1950 currently stands at about 475.

The next table shows the deviation from the average at major tops and bottoms and the return from highs to lows and lows to highs. The market in its early stages till about 1987 always peaked out at about 2 standard deviations above the average. Since 1987 the market has gotten as high as 5 standard deviations above its long term average. Bottoms tend to occur within 1.5 standard deviations from the average. Every key top at above 2 standard deviations from the mean produced a decline of at least 16%. The current market is the fourth most over extended market in history.

Table 2: No of Standard Deviations from the Average at Major S&P 500 Tops/Bottoms and Subsequent Returns from Tops to Bottoms and Bottoms to Tops

Date	No of Standard Deviations from Average	% Change
November 25, 1968	2.13	-33%
May 18, 1970	0.53	66%
January 2, 1973	2.03	-48%
September 30, 1974	-0.11	119%
December 22, 1980	2.17	-24%
August 2, 1982	0.93	224%
August 17, 1987	4.57	-33%
30-Nov-87	2.35	430%
13-Jul-98	4.93	-18%
31-Aug-98	3.78	57%
20-Mar-00	4.63	-26%
2-Apr-01	2.73	14%
14-May-01	3.20	-25%
10-Sep-01	2.14	21%
11-Mar-02	2.64	-31%
30-Sep-02	1.53	95%
8-Oct-07	2.84	-56%
2-Mar-09	0.71	78%
19-Apr-10	1.87	-16%
28-Jun-10	1.43	31%
2-May-11	2.07	-16%
15-Aug-11	1.58	89%
13-Jul-15	3.04	?

Finally drilling down to tops and bottoms since 2000, the average top to bottom decline since 2000 is 28% while the average bottom to top return since 2000 is 55%.

So the question begs what does it mean for today’s market? We have already started breaking down from over extended levels. The current market average is about 474 and standard deviation is 544. Here are some scenarios below:

Table 3: S&P 500 Possible Scenarios

Market Average (MA)+ Standard Deviation (SD)	S & P 500 Level
MA	474
MA + 1 SD	1018
MA + 2 SD	1562
MA + 3 SD	2106

The bottom line is folks we are historically over extended. We could now correct to at least 2 standard deviations above the long term average which is close to the 2008 highs near 1575 or to a standard deviation (#stdev) above the long term average as was the case at the 2008 lows near 1018 or to the long term average near 474 which we haven’t revisited since 1974. Only time will tell.

By Rajveer Rawlin

http://rajveersmarketviews.blogspot.co.uk/

Rajveer Rawlin received his MBA in finance from the Cardiff Metropolitan University, Wales, UK. He is an avid market watcher having followed capital markets in the US and India since 1993. His research interests includes areas of Capital Markets, Banking, Investment Analysis and Portfolio Management and has over 20 years of experience in the above areas covering the US and Indian Markets. He has several publications in the above areas. The views expressed here are his own and should not be construed as advice to buy or sell securities.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.