Wednesday, 13 May 2009

The trend is still your friend

The chart above shows the S&P 500 from May 1960 to May 2009 using a log scale. This raises the following obervations:
  1. Notwithstanding the bear market from 2000 to 2009, a clear upward trend is still in place
  2. The S&P 500 is currently -2 standard deviations from the trend, which, if still in place, suggests a buy signal as the bear market is now complete, having moved from +2 to -2 standard deviations versus their long term trend
  3. It is unsurprising that US equity returns have experienced a 'lost decade' given how out of line US equities were in the late 1990's (+2 standard deviations vs. long term trend)

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