S&P 500 – Market Strategy Update (Update 2)

With Friday’s employment number released, and the market reaction to this data point, seems to have everyone running for cover.  Well let’s do a market overview using our S&P model price chart as a focus.  Remember, we have individual charts on every company in the S&P 500 (and many more), so if we aggregate them into one chart, we can perform analysis on the US market as a whole.

We have written twice before on S&P 500 market strategies and here are those blogs.

S&P 500 – Market Talk with Model Price

S&P 500 – Model Price Market Strategy Update.

Current S&P 500 Model Price Chart, based on Friday’s Close

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

As we have stated in our previous posts, above, we thought the market would correct as the S&P 500 Index lifted higher to EBV+3.  I don’t think there is any question we are in correction phase of the market now.  As a reminder, this is what I said on April 11, 2012.

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.

Current Analysis of the Present Situation

I see no evidence to change the call I made back in the spring.  When you examine our current S&P 500 Model Price chart you see the market has priced in an equal probability in terms of gains or losses.  In other words if there is a public policy response, and the market response is favorable, whatever the policy response is, the market could rally back to EBV+3 or a 15% gain.  If the situation deteriorates further, eroding investors’ confidence then EBV+2, 1067 is possible giving investors’ a further 16% loss as at Friday’s close.

Yes, I know you hate this market now.  Yes, you want to sell every stock you have.  However, the market is giving you better odds today of making money, than when you were feeling good and confident when the market was close to EBV+3 or 1422.  See back in April you had 2% upside and 26% downside.

So what is the probability of a 15% gain versus a 16% loss.  I say 60/40.  The “X” factor is obviously Europe, in that everyone agrees the situation is hopeless economically and the only solution is a political one.  We don’t have a model price chart on European politics!

What I do find interesting is the S&P 500 index is only half way through the “zone” – between EBV+3 and EBV+2.  The business news being so negative you would think the index would be closer to support or EBV+2.  Depending on the news headlines going forward, the S&P 500 index may fall to EBV+2 in the future, further putting the probability in your favor for equity profits.  Hopefully, like ourselves, you took advantage of the market top in April, raised cash, and have a buy list ready for your favorite equity names at cheaper prices.  (Of course using Model Price charts for your entry points!)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s