Picture du Jour: Stock market rally – long in the tooth?

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The chart below, courtesy of Chart of the Day, compares the inflation-adjusted S&P 500 performance during the current secular bear market (the inflation-adjusted S&P 500 peaked in 2000) to the that following the peak of 1929 (i.e. during the Great Depression).

The S&P 500 for both 2000 to present (blue line) and 1929 to 1949 (gray line) have been normalized to where each of the peaks begins in year zero and at the $100 level.

“What is of interest is not that both of these markets had declines and rallies of equal magnitude – they did not. What is of interest is that both bear markets have tended to head in the same direction for approximately the same amount of time,” said the report. “For example, both bear markets suffered through a major decline during the first 2½ years and then rallied sharply into year seven. Both markets then formed a major peak in year seven and declined sharply in the middle of the eighth year. Both bear markets have continued to follow a similar path following the eighth year trough.”

The upshot of this is that if the similarity in direction were to continue, the nascent stock market rally would need to peak fairly soon.

Source: Chart of the Day, December 22, 2010.

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