Stock Market Follows Multiyear Price Cycles (January 1871 - Present) - Stock Prices are Overextended

You can use the chart below of the S&P 500 inflation-adjusted (real) prices as a guide to analyze the future direction of stock prices. The chart shows five major cycles constrained by the lower boundary and upper boundary of a multiyear secular price channel from January 1871 to the present. The price data used in the chart are derived from S&P 500 monthly price data from Yale University economist Robert Shiller and found at Quandl.

The upper and lower parallel green trendlines define the price channel.

The upside green line midway between the upper and lower boundaries is the long-term trendline that was fitted using a simple linear regression model.

The six major cycles within the price channel are complex, making the overall pattern of prices quite volatile over long periods. Each of the first five major cycles is defined by a multi-year upside and a multi-year downside (red trendlines). There are minor cycles with well defined price upsides and downsides within each of the five major cycles.

Currently, stocks are in the sixth cycle and are at or near all-time highs and well above the upper boundary of the long-term trendline.

Click chart to enlarge it.

If history repeats, investors can expect a multiyear period of volatile prices to occur in the coming years.

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