Stock chart on trading floor of NYSEThe U.S. stock market has been on a tear since September, gaining more than 20% in a mere five months. For perspective, annual equity returns average about 5% over the long run.

That means the market has logged four years of average gains in only five months. And it raises the question: What's next for the U.S. markets, not just next month, but in the next year or two?

The bullish case is well established: The economic recovery is solidly advancing, corporate profits are still rising, inflation is low and some evidence shows companies are starting to hire again.

Let's look at a 10-year chart to identify the bullish targets for the Dow: 13,000 and then 14,000.

Chartists have long noted that long-term tops often form what is called a "head and shoulders" pattern in which lower "shoulders" precede and follow the peak or "head." This pattern is clearly visible in the Dow's 2007-2008 top and decline.

The sharp 84% rise from the March 2009 low has brought the Dow back above the 12,000 level and into a band of resistance and potential support around 11,900 to 12,200. The next stop for the bulls is 13,000, the left shoulder on the chart above, last touched in 2008. Beyond that, the next goal is the 14,000 level that marked the 2007 top.

From the view of a 10-year chart, we can see that this advance from 6,500 to 12,170 has been meteoric compared to the more leisurely recovery from 2003-2006, when it took about four years for the market to advance from 7,600 to over 12,000. This suggests that the past two years have been extraordinary rather than typical, and so we might expect more typical returns in the years ahead.

What's Typical?

You'd think figuring out what "typical returns" are would be a relatively straightforward calculation, but -- as with many things financial -- it turns out to be complicated. Some calculate long-term annual returns of around 7%, and others estimate 6.5% as a reasonable expectation for total returns, or dividends plus appreciation/growth. Yet other careful analyses reckon that a return of roughly 4.1% is more realistic.

Why is it so difficult to assess mean returns over the long term? Economists Eugene Fama and Kenneth French have shown that the uncertainties of expected returns don't diminish over long time frames, so the uncertainties of 30-year and 50-year returns are higher than shorter-term yields. In effect, the uncertainty over two years is four times the uncertainty over one year.

Calculating long-term returns and mean returns turns out to be an inherently iffy proposition. "In particular, we don't know the true expected returns on portfolios," Fama wrote in an investment forum in 2009. "We typically use historical average returns to estimate expected returns, but the estimates are quite noisy, and they leave lots of uncertainty about true expected returns."

In other words, projections using average annual returns are guesstimates because historical returns aren't reliable guides.

To put this truism into perspective, let's turn to some longer-term charts showing the Dow, from 1977 to the present, and the broad-based S&P 500 index , from 1965 to the present.

We can see that stocks really took off in 1995, and made an unprecedented ascent in five short years to the dot-com top in 2000. In the Dow, this top marks what could be a left shoulder in a multiyear topping pattern, with the peak reached about seven years later in 2007 tracing out the head. If this pattern holds, then the current rally may be the right shoulder.

Alternatively, the Dow might reach for the 14,000 level, and either form a double top there or move on to new heights.

The S&P 500 has already traced out a multiyear double top, with the first peak in 2000 and the second in 2007.

A Return to the Long-Term Average

One tool statisticians use is the "regression (or reversion) to the mean," which refers to the probability that extremes of activity or response tend to revert to the long-term average.

This suggests that any period of extreme outperformance, such as the past 22 months, will be followed by lower and more average returns.

We can estimate the mean return in several ways. On the charts, I took 2% above inflation as a baseline return. At this rate, $1 invested in 1989, six years into the great 1982-2000 Bull Market, would have grown to $1.52 in 2010. A dollar in 1989 now equals $1.76 in 2010 dollars, so I've multiplied our return by 1.76 to adjust for inflation.

By these calculations, the Dow should be around 5,300 and the S&P 500 should be about 800.

If we forget inflation and just plug in an annual mean return of 6.5%, then the S&P 500 should be about 1,125. If we go with a 5% mean return, then the S&P 500 should be around 835.

A Safe Bet, If. . .

Author and analyst Jeremy Siegel found that since the early 1800s, equities had never offered a negative return, after inflation, if held for 17 years or more. That suggests stocks are a safe bet for long-term investors, if they can handle short-term volatility.

Technically speaking, these long-term charts suggest that stocks entered an unusual period of outperformance in 1995 that will eventually end as returns revert to longer-term averages. Nobody knows what those averages will be, but we can look to history from some guidance, and to charts for possible future outcomes.

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May 29 2011 at 1:28 AM Report abuse rate up rate down Reply

All you doomsayers are fueled by your low self esteem and absence of significant financial resources. It's obvious that you don't understand the sophisticated mechanics of investments and are bitter about those who do. Put a sock in it and go back to your sorry lives.

February 09 2011 at 12:21 PM Report abuse rate up rate down Reply

The rich seem to be fairing well after steeling all the middle class stash. Can someone explain why these fools are not in prison? It is very obvious that something really stinks here. The middle class are pretty musch destroyed and the American Dream shattered as the GOP launched the Great Deception of 2010 and the stock market soars this high in a Depression. It is only a Depression of the middle class to make the rich and powerful feel better with a much larger divide between the classes. This is NOT what our forefathers pictured! Our representative republic has failed. We must go to a pure democracy NOW! What would Jesus do? Go for Democracy I would imagine from my readings.

February 09 2011 at 6:56 AM Report abuse +1 rate up rate down Reply
Robert & Lisa

The rich keep getting richer and the middle class and the poor keep getting poorer. The last two years more so than ever. Still think Obama and the corrupt Demoncrat thugs are the answer? There is a reason the elite, rich man, George Soros and his corrupt, evil, rich cohorts are supporting the unions and the corrupt Demoncrat politicians. After being brainwashed by our Socialist Government Educational system, are you smart enough to understand why?

February 09 2011 at 6:21 AM Report abuse +1 rate up rate down Reply

hock your gold to jp Morgan, take the paper money and invest at the gambling tables, er, the morgan won`t mind taking a loss on that gold.....right

February 09 2011 at 5:28 AM Report abuse rate up rate down Reply

The current run up of the markets is powered by bailout money given to large investment banks. Portions of the bailout sums are ten invested in the stock market, so much of the run is govt "inspired." This is a bubble unless the bailout money keeps coming, but in that case inflation will negate any real profits from the market in general. It's a house of cards ready to fall and too risky for my taste. The biggest part of the investing population has been the "boomers," who are retiring in droves, and instead of putting money into the markets from earned wages are going draw on their investments to pay their bills and sustain their lifestyles. This is a diminishing of investment capital available to the markets and the future of the markets is much less bullish with this new boomer dynamic. Real estate will be affected (has been) affected as well since the boomers are now downsizing and putting their larger and maybe second homes on the market which already has a glut of unsold inventory. There really is no fundamental reason for real estate prices to return to the previous highs attained during the bubble.

February 09 2011 at 5:27 AM Report abuse +2 rate up rate down Reply

I'm not putting one red cent into this market until it has legs to stand on.

February 09 2011 at 1:40 AM Report abuse +3 rate up rate down Reply
1 reply to chens93883's comment

What's a red cent?

February 09 2011 at 12:11 PM Report abuse rate up rate down Reply

When a country like this one and its goverment watches while the backs of its powerful middle class and many other working people get broken, things change and mistrust sets in, the stock market can reach 15,000 or what ever and the rich might get richer but there is a thick line between the american people and its goverment and this thick line will not be forgotten in any time soon. When many had a lot and making head way and it was yanked off from them don,t expect the millions to foreget easy and to trust will not come in a long time. Many 401ks are killed, many finacial households are killed, many savings are getting low fast, mean while ALL prices are going up to the tune of 40%, and chocking the average working person to death. The internet has brought people togeather and they are finding out that they are not alone in this struggle, the goverment and the rich, and the banks better watch there step , because there are many of us and few of them, and the many can make a difference.

February 09 2011 at 1:29 AM Report abuse +1 rate up rate down Reply

It's not republicans... it is the Biltenberg Society. They manipulate wars, currencies, financial systems, and they control the distribution of global wealth, like it or not.

February 08 2011 at 11:22 PM Report abuse +2 rate up rate down Reply
2 replies to ATM's comment

close....might check that spelling, make it easier to research that way

February 09 2011 at 5:24 AM Report abuse rate up rate down Reply

Before you go off on a rant, get the name correct. It's The Bilderburg Group.

February 09 2011 at 12:14 PM Report abuse rate up rate down Reply

Wall street is unable to do anythingmore than anyone else- guess. they try to make it feel like they know - and if they do know, then it shows how manipulated the system has become. They don't know jack, and they are no more than gypsies in suits,trying to sell their inventory toyou as prices rise, so they can get out. Watch out- there is always a day of reckoning.

February 08 2011 at 11:20 PM Report abuse +2 rate up rate down Reply