Chart Shows How Much Longer Stocks Will Be in Rally Mode

I probably don’t have to tell you that stocks are up in 2013. Since the first trading day in January, the S&P 500 index has climbed 6.7%. That’s huge performance for a month and a half of trading.

To put things in perspective, if stocks kept up their breakneck pace, we’d be looking at a nearly 54% gain in the stock market this year.
#-ad_banner-#So, even if it feels like stocks are calmly and quietly inching higher, they’re not. There’s no question about it, Mr. Market is on fire right now.

The question is how much longer stocks will be in rally mode.

The short answer is “for a while”…

Back in November, I shared an interesting chart with my Trend Playbook readers. It showed the S&P 500 synched up with itself from 450 days ago.

The chart was important for two big reasons: First, with the fiscal cliff fast approaching, it lined up price action from the last period of government-induced panic to the one we were in back then. Second, the two periods matched up remarkably.

Here’s what the chart looked like at the time:

You can see how the major peaks and troughs took place at nearly the same times. That gave us a big tool to try to predict what the market was likely to do heading into 2013 — with similar price action and similar external factors affecting investors, it makes sense that they’d be trading stocks the same way.

The white dashed line in the upper chart shows what I thought the big index would do for the rest of 2012 and into this year. Sure enough, that crude little dashed line has done a stellar job of matching up with the S&P’s march higher. So where do we go from here?

We correct.

That sounds ominous, but it’s not — not necessarily. One key to notice in the chart above is the fact that corrections (or pullbacks) were more severe in our older time period (on the bottom chart) than they are now. So while the S&P retraced through its previous lows after the debt ceiling deadline in the bottom chart, our current upper chart was more of a sideways move. That’s because this time, corrections are being fueled by buyers taking a break, rather than sellers panicking and taking profits.

That means that even though stocks started giving back gains temporarily 450 days ago, I think that we’re more likely to see this correction move us sideways for the rest of the month than erase the progress stocks have already made in 2013. And longer term, this model sets us up for much bigger gains over the next quarter.

To show you how I see this playing out, let’s take a closer look at the most recent leg of the rally we’re in right now:

The S&P’s latest push came off of mid-November’s lows, and it’s come in spurts. After quick buying frenzies, the S&P is blowing off some overbought momentum by correcting. But while we ended the year on a downward correction, it’s clear that we’re only in a sideways correction right now. And in fact, it may be over sooner, rather than later.

As I write, the S&P 500 is just 2.7% lower than the all-time high that the index hit back in 2007. In fact, in the history of investing, the big index has spent only a month or so higher than it is right now. From an investor psychology standpoint, that’s a good place to be.

Until the market’s technicals stage a big change, I’m remaining cautiously optimistic about stocks in 2013. You should too…