Losing Streak Sends S&P 500 Looking for Summer Market Lows

With stocks down for the sixth straight week, we need to start looking at where we might expect to see the summer market lows. So here is the question to ponder: How far could the Standard & Poor's 500 Index sink during the summer and stay within its two-year, bull-cycle uptrend? We can forget about the exact reasons this might happen -- there are ample candidates, ranging from the weak economy to withdrawal from quantitative easing -- and just focus on outcomes. My answer is that it could fall as low as 1,137 to 1,192 -- so figure the middle of that range, with 1,165 as a target. First, stare at the chart for a minute. What jumps out at you? The best uptrend line you can draw connects the two mid-summer lows of 2009 with two mid-summer lows in 2010. Hmm. In those two years, we were coming out of a terrible bear market, but at least there was some optimism that business, credit, consumers and employment trends were recovering. Central banks around the world were in sync, providing incredible liquidity. Economies were in a recovery mode. Now fast-forward to this year and optimism seems to have vanished, central banks are out of sync, the U.S. and Japanese economies are sputtering, and liquidity is about to be withdrawn. In that context, why would this be the only year in which there were no summer lows to attach to the dotted line? The Dotted Line Prophecy There are a lot of fancy statistical ways to determine how big a decline might be necessary to fulfill my Dotted Line Prophecy. But often the simplest way works best. Figure the first decline marked by a red line, from 956 to 869, amounted to a 9% drop. Then the next decline, from 1,219 to 1,010, amounted to a 17% decline. Average and weight them to get a potential 15% drop. That gets you to 1,164. Note that 1,164 is where the line will be by around mid-August if you project it out. So it has a certain air of destiny about it. If we see this drop, there will be no shortage of reasons for it. Yet try to remember all the reasons for last summer's 17% decline. I seem to recall something about the dollar, Greek debt, maybe a little Portuguese something or other, probably some earnings warnings. But eventually the game always comes back to corporate earnings growth and expectations, and liquidity supplied by central banks. It turned out companies were able to figure out how to turn a profit even though revenue growth had stalled. And it didn't hurt that U.S., Chinese and European central banks helped grease the skids by printing more money. The point here is that a sizeable decline could occur and it would not be the end of the world, or even of the bull market. At some point, unless the earth has really gone off its axis, the politicians and central banks will gin up a reason to crank up the printing presses again and survivors like Altria Group, Inc. (NYSE: MO), International Business Machines, Corp . (NYSE: IBM) and Caterpillar Inc . (NYSE: CAT) will show they were able to adapt and thrive once again. Bottom Line: Expect a bottom sometime during the next five days amid options expiration week, followed by a modest summer rally. Once the current oversold condition is relieved, expect to batten down the hatches for a couple of months. I had hoped we would be able to avoid this, but it's beginning to look like it is baked in the cake. Click here to read on...