History Suggests the S&P 500 Could Experience a Major Upside Breakout Very Soon

Did the title get your attention?  It got ours as well as we examined this rally, and once again the rhyme from 2010 tells us we are right on track to see a continuation of the rally in the next 7 weeks and should see the S&P 500 move up by 10% from today's level of 1241.  If this historic advice is accurate it could produce a major upside breakout in this 2009 to 20?? bull market that should certainly make our Asset Allocation Model's target for the next two years.  Let me show you the amazing correlation with last year's correction...and the subsequent after effects.

The extent of this year's correction was more severe than in 2010...and so has been the rally from that low point in October.  But the timeline is perfect from that first correction in both years, the "head" of the reverse head-and-shoulders, and the right shoulder.  If you observe the slope of the advance you see very similar action, and even though the initial rally this year out of that low point was stronger, you can see now we are back in a perfect track with last year's action.  So let me refresh your memory on what happened in last year's rally and in the ensuing months.

Click on the image above to view a larger chart.

I don't want to put too much of this rhyme in your thoughts, but this example has been outstanding as a hand-holding comfort as we read all the somber news.  So IF we see this trend continue, and most certainly our Asset Allocation Model has been predicting the same kind of future performance, but IF we see this trend continue, by the end of February 2012 we should see the S&P 500 back to that previous high we were enjoying in April of this year.

The rally would produce an upside breakout, and I would guess the next resistance point would be that old high of 1576 on the S&P 500.  Now if you remember...and I'm sure you do...we certainly did not expect the extent of the very sharp correction in 2011.  Our Psychology Composite had moved to P5, which has a history of producing a correction, but the 21% correction was much more severe than we had anticipated.  But we do expect in 2012 to get back on track.

It has been a tough year for investors, as we have written about, and the fear that we have witnessed has produced very poor performance in most growth investor's portfolios.  The market has been driven by those defensive sectors like Utilities, Consumer Staples, and Healthcare, while the Industrials, Materials, and even Technology stocks have lagged far behind.  But that is the past. 

Unless something very unusual happens, we are entering 2012 with a strong infrastructure of very ample Monetary Liquidity, and stocks are also unusually undervalued.  Furthermore, as some of the longer-term Psycholody indicators, the stage is certainly set for a much better 2012 for those of us that are growth stock advocates.

That is promising, but this season offers promise much greater than that, and in that spirit we wish you a Merry Christmas and a Happy New Year. 

Don Hays

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