S&P 500 – Market Strategy Update

Being July 4, 2012 and all is quiet, it’s a good time to look at our model price chart on the S&P 500.  I last posted a Market Strategy Update on June 4, 2012, close to, if not the darkest period of the last correction.

In my June 4, 2012, blog, I quote heavily from my April 11, 2012 blog where I predicted,

“… 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 have a look at the current model price chart calculated on July 3, 2012, for the S&P 500. As I have commented in previous blogs, this model price chart groups together all the 500 companies in the S&P 500, so we can view them as one chart.

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

Since my blog post on June 4th, the S&P has rallied and we are 7.5% from EBV+3 or 1478.  As we approach EBV+3 the risk in the U.S. markets will increase.  As the market approaches this level, obviously sets investors up for, you guessed it, another correction.  This correction will probably occur in the fall, just a guess on my part.  The depth and the duration of this estimated correction is you guessed it, hard to predict.  But at least readers won’t be shocked when this happens.  As I wrote in my April 11 blog:

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.

 As we enter the second quarter earnings season the U.S. markets seem to want to rally into what the market senses as good news with companies leading this US market, which are domestic companies with not a whole lot of international exposure.

As always it will be interesting to see what happens, however remember the more this US market rallies to 1478, or EBV+3 the more risk investors are taking before the next correction.

Another side note I will offer, as I look at the new 52-week high list, is the observation that the market seems to be working again in that there seems to be more discrimination on part of investors with individual stock names.  It has been some years that I can make this observation, especially in the world of High Frequency Trading (HFT) and “Flash Crashes”.  In other words, good old fashion “stock picking” maybe coming back into vogue.  If this is the case, using model price charts will help investors increase profits, over risk-on/risk-off macro calls, which have become the norm over the last couple of years or so.

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