Eoin Treacy's view The S&P 500 hit a peak near 1550 in March 2000 and has spent much of the last 12 years ranging in a volatile manner. A delegate at The Chart Seminar a few years ago recounted how she had invested in a tracking fund almost 10 years earlier. Despite having held the investment for a decade she had nothing to show for it. The sensation must have felt akin to running in order to stand still, given the major market events that took place during the intervening years.

An important emotional characteristic of ranging markets is that expectations deteriorate. The longer a range persists the more disappointed those who bought at the top of the congestion area become. They are then less likely to buy the next time prices return to that level. The exact same process occurs for short sellers at the bottom of the range. Therefore the range represents a conditioning process and expectations deteriorate. People tend to predict what they see, so when a market has been ranging for a prolonged period most people will predict that it will continue to range.

This is not the first time the S&P500 Index has spent such a long time ranging. The period between 1965 and 1980 was quite similar. During this time the 1000 point level was referred to as a glass ceiling for the Dow Jones Industrials Average because it had encountered resistance near it on successive occasions. This 15-year cycle was characterised by a generational long process of P/E ratio contraction and rising dividend yields. In other words while prices went mostly sideways, earnings improved so that P/E ratios contracted. The market became fundamentally cheaper by simply going sideways. Over the last 12 years the S&P500's P/E has fallen from a June 2000 peak near 30 to its current 14.29; reflecting a similar process of valuation contraction.

One of the challenges in monitoring P/E data over a lengthy time horizon is that some stocks occasionally have a very poor quarter in terms of earnings and this tends to skew the chart. Data spikes are evident for a considerable number of shares in 2000 and 2008. Therefore, the most consistent P/E charts tend to be for companies that have had relatively steady earnings.

In the healthcare and pharmaceuticals sector Abbot Laboratories (P/E, Price) is an S&P500 dividend aristocrat (3.1%) which reflects its solid record of dividend increases over at least 25 consecutive years. Its P/E peaked in 2002 at 31 and fell to a low of 10.75 in early 2011. It price terms, it spent the period from late 2001 ranging with an upward bias and broke upwards to new highs in March.

Baxter International (P/E, Price) also has a solid record of dividend increases and currently yields 3.1%. Its P/E peaked near 32 in 2002 and is currently at 13.62. The share has been ranging mostly below the $60 area, which also marked the 2002 peak, since 2009 and a sustained move below $50 would be required to question medium-term scope for a successful upward break.

Pfizer (P/E, Price) reinstated its policy of dividend increases in 2010 and currently yields 3.69%. The share's P/E peaked near 70 in1999, bottomed in 2009 at 5 and is currently near 10. The price chart remains in a consistent medium-term uptrend and a sustained move below $22 would be required to question potential for additional upside.

Merck (P/E, Price) has a solid record of dividend payments and currently yields 3.93%. The P/E chart peaked in 1999 near 35 and is currently close to 11. The share broke out of a 30-month range in June and a sustained move below $40 would be required to begin to question medium-term scope for additional upside.

Eli Lilly (P/E, Price) yields 4.38% and its P/E has contracted from a peak near 50 in 1998 to a low of 7 in 2009. It now appears to have entered a process of expansion and is trending higher, currently at 11.95. The share completed a base in December 2011 and has held a progression of higher reaction lows since. A sustained move below the 200-day MA, currently near $41.20, would be required to question medium-term upside potential.

Johnson & Johnson (P/E, Price) is an S&P500 dividend aristocrat and yields 3.61%. Its P/E peaked near 39.5 in 1999 and hit a low near 11 in 2009. The share has been ranging below $70 since 2002 and a sustained move below $65 would be required to question medium-term demand dominance.

Bristol-Myers Squibb (P/E, Price) yields 4.03%. Its P/E peaked near 39 in 1999 and hit a low near 11 in 2009. The share has held a progression of higher major reaction lows since 2008 and completed an 8-year base a year ago. It posted an upside weekly key reversal last week and a sustained move below $31.30 would be required to begin to question recovery potential.

In the technology sector, Microsoft yields 2.61% (P/E, Price). Its P/E peaked in 1999 near 70 and it currently trades closer to 11 following a decade long decline which has probably bottomed. The share has been largely rangebound since 2001 but has been ranging in the region of the upper side since February and a sustained move below $28 would be required to begin to question potential for a successful reassertion of the medium-term uptrend.

Intel (P/E, Price) yields 3.6%. Its P/E peaked near 70 in 2002 and had fallen to the 10 area by 2008. The share has been ranging mostly below $30 since 2002 but has held a progression of higher reaction lows since 2009. It will need to continue to hold in the region of $25 if the medium-term upside is to continue to be given the benefit of the doubt.

Oracle (P/E, Price) yields 0.76%. The P/E peaked near 140 in 2000 and has been ranging below 20 since 2007. The share has held a progression of higher major reaction lows since 2002 and a sustained move below $25 would be required to question medium-term scope for continued upside.

In the consumer sector Colgate Palmolive (P/E, Price) yields 2.33% and has a solid record of dividend increases. The P/E peaked near 44 in 1999 and bottomed near 14.5 in 2009. Prices found support in the region of the 1999 peak in 2009 and reasserted the medium-term uptrend by later that year. A sustained move below the 200-day MA, currently near $100, would be required to question medium-term upside potential.

Coca Cola (P/E, Price) yields 2.69% and is an S&P 500 dividend aristocrat. The P/E peaked near 57 in 1998 and fell to a low below 13 by 2009. The ratio has since recovered to almost 20. The share trended lower until 2005 and has held a progression of higher major reaction lows since. It is currently in a process of mean reversion and the benefit of the doubt can continue to be given to the medium-term upside provided it continues to hold above or in the region of the 200-day MA.

Wal-Mart (P/E, Price) is another S&P 500 dividend aristocrat and yields 2.18%. The P/E peaked near 59 in 1999 and trended lower until last year; when it hit at least a medium-term low near 11. The share has rallied impressively over the last few months to post new all time highs and while somewhat overbought in the short-term, nothing has occurred to question the new secular bull market hypothesis.

In conclusion the above charts give a flavour for how a number of Autonomies are moving out of a process of valuation contraction and are potentially entering a generational long process of P/E ratio expansion. It is still too early to draw the same conclusion for the wider market. Nevertheless, following a 12-year process of consolidation, it is reasonable to assume that the wider market is closer to the end than the beginning of its valuation contraction. (Also see Comment of the Day on July 3rd). The S&P 500 hit a peak near 1550 in March 2000 and has spent much of the last 12 years ranging in a volatile manner. A delegate at The Chart Seminar a few years ago recounted how she had invested in a tracking fund almost 10 years earlier. Despite having held the investment for a decade she had nothing to show for it. The sensation must have felt akin to running in order to stand still, given the major market events that took place during the intervening years.

An important emotional characteristic of ranging markets is that expectations deteriorate. The longer a range persists the more disappointed those who bought at the top of the congestion area become. They are then less likely to buy the next time prices return to that level. The exact same process occurs for short sellers at the bottom of the range. Therefore the range represents a conditioning process and expectations deteriorate. People tend to predict what they see, so when a market has been ranging for a prolonged period most people will predict that it will continue to range.

This is not the first time the S&P500 Index has spent such a long time ranging. The period between 1965 and 1980 was quite similar. During this time the 1000 point level was referred to as a glass ceiling for the Dow Jones Industrials Average because it had encountered resistance near it on successive occasions. This 15-year cycle was characterised by a generational long process of P/E ratio contraction and rising dividend yields. In other words while prices went mostly sideways, earnings improved so that P/E ratios contracted. The market became fundamentally cheaper by simply going sideways. Over the last 12 years the S&P500's P/E has fallen from a June 2000 peak near 30 to its current 14.29; reflecting a similar process of valuation contraction.

One of the challenges in monitoring P/E data over a lengthy time horizon is that some stocks occasionally have a very poor quarter in terms of earnings and this tends to skew the chart. Data spikes are evident for a considerable number of shares in 2000 and 2008. Therefore, the most consistent P/E charts tend to be for companies that have had relatively steady earnings.

In the healthcare and pharmaceuticals sector Abbot Laboratories (P/E, Price) is an S&P500 dividend aristocrat (3.1%) which reflects its solid record of dividend increases over at least 25 consecutive years. Its P/E peaked in 2002 at 31 and fell to a low of 10.75 in early 2011. It price terms, it spent the period from late 2001 ranging with an upward bias and broke upwards to new highs in March.

Baxter International (P/E, Price) also has a solid record of dividend increases and currently yields 3.1%. Its P/E peaked near 32 in 2002 and is currently at 13.62. The share has been ranging mostly below the $60 area, which also marked the 2002 peak, since 2009 and a sustained move below $50 would be required to question medium-term scope for a successful upward break.

Pfizer (P/E, Price) reinstated its policy of dividend increases in 2010 and currently yields 3.69%. The share's P/E peaked near 70 in1999, bottomed in 2009 at 5 and is currently near 10. The price chart remains in a consistent medium-term uptrend and a sustained move below $22 would be required to question potential for additional upside.

Merck (P/E, Price) has a solid record of dividend payments and currently yields 3.93%. The P/E chart peaked in 1999 near 35 and is currently close to 11. The share broke out of a 30-month range in June and a sustained move below $40 would be required to begin to question medium-term scope for additional upside.

Eli Lilly (P/E, Price) yields 4.38% and its P/E has contracted from a peak near 50 in 1998 to a low of 7 in 2009. It now appears to have entered a process of expansion and is trending higher, currently at 11.95. The share completed a base in December 2011 and has held a progression of higher reaction lows since. A sustained move below the 200-day MA, currently near $41.20, would be required to question medium-term upside potential.

Johnson & Johnson (P/E, Price) is an S&P500 dividend aristocrat and yields 3.61%. Its P/E peaked near 39.5 in 1999 and hit a low near 11 in 2009. The share has been ranging below $70 since 2002 and a sustained move below $65 would be required to question medium-term demand dominance.

Bristol-Myers Squibb (P/E, Price) yields 4.03%. Its P/E peaked near 39 in 1999 and hit a low near 11 in 2009. The share has held a progression of higher major reaction lows since 2008 and completed an 8-year base a year ago. It posted an upside weekly key reversal last week and a sustained move below $31.30 would be required to begin to question recovery potential.

In the technology sector, Microsoft yields 2.61% (P/E, Price). Its P/E peaked in 1999 near 70 and it currently trades closer to 11 following a decade long decline which has probably bottomed. The share has been largely rangebound since 2001 but has been ranging in the region of the upper side since February and a sustained move below $28 would be required to begin to question potential for a successful reassertion of the medium-term uptrend.

Intel (P/E, Price) yields 3.6%. Its P/E peaked near 70 in 2002 and had fallen to the 10 area by 2008. The share has been ranging mostly below $30 since 2002 but has held a progression of higher reaction lows since 2009. It will need to continue to hold in the region of $25 if the medium-term upside is to continue to be given the benefit of the doubt.

Oracle (P/E, Price) yields 0.76%. The P/E peaked near 140 in 2000 and has been ranging below 20 since 2007. The share has held a progression of higher major reaction lows since 2002 and a sustained move below $25 would be required to question medium-term scope for continued upside.

In the consumer sector Colgate Palmolive (P/E, Price) yields 2.33% and has a solid record of dividend increases. The P/E peaked near 44 in 1999 and bottomed near 14.5 in 2009. Prices found support in the region of the 1999 peak in 2009 and reasserted the medium-term uptrend by later that year. A sustained move below the 200-day MA, currently near $100, would be required to question medium-term upside potential.

Coca Cola (P/E, Price) yields 2.69% and is an S&P 500 dividend aristocrat. The P/E peaked near 57 in 1998 and fell to a low below 13 by 2009. The ratio has since recovered to almost 20. The share trended lower until 2005 and has held a progression of higher major reaction lows since. It is currently in a process of mean reversion and the benefit of the doubt can continue to be given to the medium-term upside provided it continues to hold above or in the region of the 200-day MA.

Wal-Mart (P/E, Price) is another S&P 500 dividend aristocrat and yields 2.18%. The P/E peaked near 59 in 1999 and trended lower until last year; when it hit at least a medium-term low near 11. The share has rallied impressively over the last few months to post new all time highs and while somewhat overbought in the short-term, nothing has occurred to question the new secular bull market hypothesis.

In conclusion the above charts give a flavour for how a number of Autonomies are moving out of a process of valuation contraction and are potentially entering a generational long process of P/E ratio expansion. It is still too early to draw the same conclusion for the wider market. Nevertheless, following a 12-year process of consolidation, it is reasonable to assume that the wider market is closer to the end than the beginning of its valuation contraction. (Also see Comment of the Day on July 3rd).