Where is S&P500 Index heading to?

I had built a financial model years ago. This model shows that over the past 10 years US interest rate and S&P500 have a close correlation.

In 30 July 2008, I had posted an article (see here) predicting that there is a lot of downside potential for S&P500. As you can see from the chart below S$P500 and Fed rate have a high gap. S&P500 was trading at 1263 then. We know what happens after that: S&P500 fell from 1263 points to a low of 663 points (9 Mar 09).

S&P500 Vs Fed Rate as at 30 July 2008

For the past months I had observed that there has been a huge divergence between US interest rate and S&p500: S&P500 has been rising but US interest rate remains at near zero percent.

So what will happen over the next few months is:
US interest rate starts to rise
OR S&P500 starts to fall

There is no likelihood of US raising interest rate soon, so the 2nd senario is more probable. So if S&P500 falls, it will create a global downturn in stock market. And high yield currencies will suffer. So do keep this in mind when you are trading in 2010.

S&P500 Vs Fed Rate as at 15 December 2009

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