Where are we going, S&P 500 wise. Just to put a mark on the wall, really, so that we know when we have arrived at a point of some significance.

• The very long term trend line (from 1932; touched in 1943, 1972 and 1983) will be at about 500 by the end of this year.
• The last two nasty bears ended at about 7 times peak earnings, in 1974-75 and 1982. That would be 594 currently.
• The P/E 10, “Undervalued,” line is at 662 on current near-record earnings. If 2nd. and 3rd. quarter earnings are no worse than 1st. quarter, a robust assumption in my view, then it will be at 544 by the time we move into the 4th. quarter.
• We’ve been above the “Undervalued” line since 1982, the beginning of the twenty-five year 1982-2007 bull market, as interest rates started to move down. We were below it for the preceding 5 years, and also in 74-75.

So these numbers converge on the low 500s as a 2009 kind of target. These are 1995 prices (nominal, of course). The Japanese market, just for reference, has recently been around the price levels of twenty-five years ago. That doesn’t mean that the low 500s is the bottom, it just means that if we go lower than that, we’re plowing new ground by violating the long-term trend line and setting lower valuations that the last two nasty bears. Conversely, there will be nothing exceptional or surprising in reaching the low 500s. At two thirds down from the peak and 60% off present levels, it might cause a certain anguish in the “buy and hold” contingent. Just for comparison, the 73-74 bear peeled off 48% in just 21 months. We’re in the ninth month of this bear, and we’re down 18% from the peak. To match the 73-74 bear, we need to drop 37% from Friday’s close over the next 12 months, to 800 or so. Morceau de gâteau, I say. Let’s show that 73-74 that it was just a cub, eh?

Edit: Time to shoot grouse.