Staring at SPY through my Rear View

It's often said that the stock market is forward looking in nature; that stock prices at any given moment reflect future expectations for growth, rather than present day value.

While this is true, it's nonetheless important to keep in mind that our expectations are constantly susceptible to change. They sway from periods of relative consistency to periods of excessive confidence or cynicism, as reflected in stock price fluctuations over time.

I’m seeing nothing but my dreams coming true, while I’m staring at the world through my rear view.
— Tupac Shakur, "Staring through my Rear View," 1971 - 1996

This is why it's difficult to ascertain as both traders and investors where the market may be going in the months and years ahead.

Charts provide us with a reference point to analyze where the market has established both support and resistance levels in the past, and sometimes it's necessary to take a step back and see where we've been to gauge where we may be heading in the future.

Let's take a look at the SPY over the past twenty years and see how far we've come and what may be in store for us next.

SPY: Over 350% Gain in Two Decades

Per Google Finance,  the S&P 500 Index is composed of 500 stocks spanning over 24 industry groups, including information technology, financials, energy, health care, consumer staples, industrials, consumer discretionary, materials, utilities and telecommunication services.

In consideration of the variety of stocks that make up the index, the S&P 500 is considered a leading economic indicator that reflects where investors project the overall economy to be heading.

$SPY : SPDR S&P 500 ETF Trust

The SPY is an exchange traded fund launched in 1993 that corresponds to the price and performance of the S&P 500 Index.

As seen on the monthly chart above, the SPY has gone up over 350% since its inception, despite several notable pullbacks in price over the past two decades.

Stocks are currently trading at all time highs, with the SPY finishing the month of August at $200.71. This is a historic moment, as expectations for the future health of the economy remain bullish.

But in looking towards the future, we still can't forget the past, as the past clearly tells us that expectations, whether optimistic or pessimistic, can become disproportionately one-sided.

This is human nature at its essence - we are the participants in the market, and the market is a reflection of our individual and collective tendencies to exceed the bounds from time to time.

For example, during the financial crisis, the SPY fell from a previous high of $157.52 in October of 2007 to a low of $67.10 in March of 2009. The predominant view of market participants at the lows was one of negativity towards the future.

The SPY bounced back hard at the March 2009 lows, which equated in price to levels last seen in 1996. In other words, in less than a year and a half, the market lost in value what it took more than a decade to previously gain.

Conclusion

We've come a long way since 2009. The bull market really began to pick up steam when the SPY broke through and held above its previous all time highs in the $155 area beginning in early 2013. We haven't looked back since.

The 10 month moving average is noted on the chart, which the SPY has consistently held above on the monthly time frame for nearly two years, tagging it only twice during this period: once in December of 2012 and again in February of 2014.

It remains to be seen how long this prevailing optimism in the stock market will continue, but the monthly chart for the SPY says it all: until the long-term rising price trend shows clear signs of weakness, traders are better off not fighting it.

Like any good driver focused on the road ahead of them, we as traders shouldn't forget to also stare back through our rear view every now and then and keep the past in perspective as well.