S&P 500 – Model Price Market Strategy Update.

Back on February 24th, we blogged about three scenarios for the S&P 500 Index and our most likely scenario.  Remember we aggregate all companies in the S&P 500 Index into one model price chart.  We can use this chart to analyze the US equity market as a whole.

At the time of our blog, February 24,2012 we produced this chart for your observation.

S&P 500 Index with weekly price bars, EBV Lines (colored lines)

We also said this below, included in our most likely scenario:

… 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.

We said additionally,

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.

Let’s look at what has happened since we wrote our blog.

First, the chart

S&P 500 Index with weekly price bars, EBV Lines (colored lines)

The market continued to rise since our post to 1422.38 on an intraday basis.  Close to EBV+3 level of 1447 cited above.  We think it’s fair to say as the market increased, since our last post, more bullish comments were being published in the leading business newspapers.  Though we realized 1447 would be a brick wall for the US market, corrections can and will occur anytime, so coming within 25 S&P points of EBV+3 before this current correction, to us was a win.

So what happens now?

The length and the time of corrections are very hard to predict, even for us.  This correction is beginning when first quarter earnings season is about to begin.  Expect the US markets to be choppy based on which companies are reporting on any given day.  But as we said in our previous post,

“… 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.

Then we should add, the market would probably correct again!  Hopefully, you see the most likely scenario unfolding before your eyes.  As the S&P 500 advances to EBV+3, everyone gets bullish.  Then the market corrects for duration of time and magnitude, the bears win.  Then we rally back to (you guessed it), EBV+3.  Overall the US equity market will move higher, as book value increases. (EBV+3 will increase 18% over the next year.)  However “feel good” traders and market timers, people who only invest when the market “feels” good, will probably suffer losses over the next year.  In other words, fearless traders who buy the dips at the most pessimistic times will do OK.

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