1970s redux.

On a number of occasions over the past couple of years I have been drawn to the strong comparison between the past decade's price action on US stocks and the similarity to the 1970s price action. I was recently reminded of this in an article on the excellent blog 'BestOnlineTrades.com', which can be seen here.


The chart below shows these 2 similar periods on the SP500 on a Log scale.

Within these consolidations there are 2 very similar periods, these being the 1974 Bear market and the subsequent rally, and the 2008 bear market and the subsequent rally . These have been highlighted on the chart below.

A closer look at these periods shows the similarities continuing (This can be seen on the 2 charts below). In the period following the very sharp bear markets of 1974 and 2008, on both occasions prices posted very strong rallies back to near where the sharpest declines in the prior bear markets began. Following that, prices then suffered an approximate 38% correction ( I am assuming here that the recent decline to lows early this month have ceased.). If these similarities were to continue, it would suggest that the SP500 could continue to climb out of this correction and eventually make new recovery highs beyond the April 2010 high, over the next 6 - 12 months, before eventually succumbing to more sideways/downward pressure. -- If I were to suggest an eventual target for gains, I guess somewhere in the 1300-1400 area, with 1350 being my most likely target.  I think the catalyst for further gains from here would be a clear break over 1130. On the downside, I would not like to see 1070 breached, with sub-1040 again bringing the bearish case strongly to the fore.  
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One final point: - I am not laying out a case for us being in a similar economic and political climate to the 70s, this is not the case, particularly when it comes to inflation or interest rates. However what is similar is that the 1970s were a time of extreme economic uncertainty, in many respects, and the 1974 recession was associated with a very deep bear market, not unlike the 2008 bear market, I have shown this in the chart of US GDP posted below. Looking at this and the above, makes me wonder whether the above mentioned dip in the US stock market in 1975 was connected to fears of a double dip recession?