How do we look at the US market as a whole? Yes, we have individual charts on every company in the S&P 500 (and many more), so if we could aggregate them into one chart, what would that chart look like? We have, and here is the chart.
S&P 500 Index with weekly price bars, EBV Lines (colored lines)
We calculate this chart on a bottom up basis, using market capitalization identical to the S&P 500. As we can see, the S&P 500 index has been in a stair-climbing situation since the beginning of the year. As of February 23, 2012, we have 6.2% to go to reach EBV+3 or 1447.
This presents investors with three scenarios:
Scenario Number One; the S&P 500 could break up and through EBV+3. This we think would be the most unlikely scenario. We are still in a very uncertain financial situation with a lot of issues unresolved. The bears at Zero Hedge could do better a better job then us explaining why this market cannot go any higher.
Scenario Number Two; the S&P 500 goes to EBV+3, and uses EBV+3 as support for sometime until the market gets a green light to break out of EBV+3. This, at best, is our most bullish scenario. From the close on February 23, 2012 (1363) to EBV+3 one year out (1607) this represents a potential gain of almost 18%.
Scenario Number Three; the most bearish case, is that the market falls to EBV+2 or 1048. Which is 23% from the close on February 23, 2012. The good news is that the projected EBV+2 one year from now, with the growth of the balance sheets, would be 1164 or a fall of 14.6%. Better, however still painful.
What is the most likely scenario?
“Bull markets climb the wall of worry” is an old quote describing financial markets. The weekly chart of the S&P 500, since the beginning of 2012, certainly describes what is going on in this market. The majority of companies in the S&P have reported 4th quarter numbers, which taken as a whole were good. Also US macro economic numbers, including employment have left the market in a positive mood. If this continues than the S&P should reach our target of 1447, or EBV+3, which would propel the S&P up another 7 percent from the February 23 close. In our estimation the only additional gains investors can expect is the growth in the book values of the companies themselves or the growth in EBV+3 line (red line). Also we think the S&P will stay in proximity to EBV+3 for the foreseeable future.
When valuations increase, risk also increases. If something were to go wrong, (i.e., policy mistake, Europe and seemingly twelve hundred other things) the market will correct from EBV+3, which will present investors opportunities to invest in their favorite names. Yes, we would buy the dips! Looking for the market to return back to EBV+3.