S&P 2300? Give It Four Years: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Source: Bank of America Merrill Lynch

The S&P 500 managed to eclipse its all-time high of 1576 earlier this year. This move takes it out of a long term trading range, and according to the Technical Analysts at Bank of America Merrill Lynch, marks a transition to a new secular bull market.

Some folks might disagree with that characterization. The arguments against are that one cannot tell for sure (and certainly not this soon) after new highs if they are false breakouts or not; they may not stick if earnings fall or rates rise. Further, given the Fed's role in driving stock prices, once The Taper begins, all bets are off as to whether we stay in the new trading range above SPX 1576.

Note that the false breakout was hellish for traders in the 1970s. The 1973-74 Pop & Drop suckered plenty of traders into what looked like a major breakout, only to collapse more than 50 percent from the highs. The 1979-80 period also saw a similar false breakout, before the next secular bull market began in 1982. J.C. Parets, the chartered market technician of All Star Charts and founder of Eagle Bay Capital notes that the 1980 false breakout ran 15 percent before falling 27 percent to the final cyclical low. At present, we are 10 percent above the trading range breakout.

I will wisely duck the debate of whether or not we are in a new bull market. In its stead, I draw your attention to an interesting aspect of this technical view of secular markets. It is projected upside, or as some technicians describe it, the measured move.

Stephen Suttmeier, Merrill's technical analyst and source of the chart above, describes how prior long-term trading ranges can be used as a guide to project how far a breakout might run. In his research note today Suttmeier points to the two prior "secular trading range" breakouts: 1937 to 1950, and 1966 to 1980. In each of those cases, the subsequent move after the breakout was roughly equivalent to the size of the prior trading range.

If this current breakout over 1576 sticks, then Suttmeier's measured move could take the S&P 500 to 2330 by 2017. That's a 50 percent gain over the breakout level. It is consistent with the gains after both the 1950 and 1980 breakouts.

My first reaction to this (as I suppose others will feel as well) was somewhere between a shudder and a dropped jaw. Stranger things have happened.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net