Let’s Talk About Market Bottoms

Now that the panic and fear is over about the Greek elections and its’ emanate break out of the Euro maybe we can have a logical, rational discussion about the potential bottom for the S&P 500.

I’m NOT saying the equity markets will go to these given levels. However, I think it helpful that these levels are considered for individuals who have money in equities and/or thinking of adding more capital to their positions. I just think it is a matter of interest where previous bottoms have occurred and where are we in relation to said previous bottoms. If fact, we are closer then you think.

S&P 500

Here is the Model Price chart for the S&P 500. Remember, we amalgamate all the model price company graphs in the S&P 500 into one chart, see below, to help us see what is going on in the market as a whole. With today’s positive market action you can see we are potentially on our way back to EBV+3 as I predicted here and here.

S&P 500 Model Price Chart. The S&P 500 closed 1344.78 on June 18, 2012. Economic Book Values (EBV) are the coloured lines.

The S&P 500 closed at 1344.78 on June 18, 2012. As you can observe from the chart, EBV+2 is a significant level for the S&P 500. Looking back at our past data, EBV +2 was the level the market bottomed during the crash of 1987 and the recession bottom and S&L financial crises of 1990. During the 2008 crises the market pierced EBV+2, spiking down almost to EBV+1, before recovering to EBV+2.

More recently, this past correction was the third since the market bottom of March 9, 2009. Each correction may have seemed terrifying but didn’t come close to EBV+2 as in past major market bottoms.

What am I saying?

1. As of June 18, 2012 we are 21% from EBV+2 or a major market bottom going back some 34 years. Yes, I agree going down 21% would not be fun, (and I’m not predicting this) but you would have to agree this would be an important market bottom that could put an end to the 2008 financial crises and mark an important point for recovery.

2. As the market corrects and comes closer to EBV+2, an investor will be taking less risk in the US market than EBV+3. This is hard I realize, but this is where hopefully our model price charts can help average investors. As markets move lower, equity shares have more value for you to benefit in the long run. Hopefully, by pointing out market lows going back decades this will help investors reach for buy tickets instead of sell tickets. See my previous blog on the Rational Investor here.

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