Stock Market Forecast For 2009

The stock market has declined over 40% since it reached the peak in October 2007. The S&P 500 index reached a high of 1,561.80 and over a year later has been trading in the 800 to 900 range. Does this mean the correction is over and we can now look for a new bull market to take place in 2009? We think it is unlikely. Why?

First, the market formed the left side of a parabolic pattern as the market essentially went straight up from 1982 to 2000. Even the 1987 crash now looks like a blip on a bubble formation.

In 1982 the index was at 103.71. Over the next 18 years it increased to 1,527.46. In other words the S&P 500 index increased by 1,500% in 18 years.

Starting in 2000 we had a sharp 3 year correction that sliced the gains over the last 18 years almost in half as the low on the S&P 500 index was 800.58. Then the market moved to a marginal new high at 1,561.80 over the next 4 years.

So to summarize we formed an ominous double top formation over a period of about 7 years. Since then in 2008 the market has started moving down again.

These types of double top patterns over long periods of time after a parabolic rise are very powerful chart patterns that signal much lower prices ahead. And when I say much lower, I mean much lower. It is not pleasant to say how this type of pattern often plays out, but here it is. The first real bounce would be expected down in the 800 area where the last correction ended. And in the latter part of 2008 that is exactly what has happened.

But I would not expect it to hold there for long. After that the next real hold area would be in the 450 area, but there is no guarantee it will even stop there. Even if it does we're probably in a depression or at least a painful recession.

Keep in mind this is an index of 500 stocks and some of them have earnings for now so I would not expect it to be as severe as some of the dot com stocks in 2000 that were taken to the moon on simply an expectation of earnings before the bubble burst. For example, YHOO topped out at around 200 and before it was over the stock was trading below 10 a couple of years later.

However, keep one thing in mind about earnings. If we go into a very serious recession or depression in the economy many of these companies will have negative earnings... in other words they will be losing money.

Bottom Line: The double top formation will not be broken unless the S&P 500 goes back above the old high of 1,561. This looks extremely unlikely in the next 12 months. I think the more likely scenario is that the market moves lower and at some point in 2009 the S&P 500 index dips below 500. The Federal Reserve and Congress are throwing trillions at the economy in hopes that we will avert a serious recession or depression. At this point I think the odds still favor a serious market and economic downturn despite their heroic efforts to stop this ugly scenario from unfolding. Only time will tell whether they will be successful, but I have my doubts unless and until I see encouraging signs in the economy. Until then the stock market is on shaky ground and subject to sudden and violent down days that will wipe out all those trying to pick the bottom in this market at this time before the final bottom is reached at much lower levels.