Monthly S&P 500 Market Strategy Update

Yes, I’m enjoying my holiday Monday.  This summer in southern Ontario has been the best I can remember.  You may think I’m crazy but I enjoy nothing better than review my model price charts when it’s the most quiet.  As I have said a few times in my blogs sometimes the charts talk to me!  They show themselves.  Any market anxiety that I may have disappears, and excitement begins to flicker.

On February 24, 2012 I wrote my first blog on the S&P 500 and outlined my Market Strategy.  I updated this original blog on April 11, then on June 4, and again on July 4.  This being August 6, 2012 it seems mentally I have been doing this on a monthly basis.  Who knew!  So let’s make this formal, at the start of every month I will review both the S&P 500 and the S&P/TSX 60.

Starting, as always, with the Model Price chart of the S&P 500.  For those new to my blog, the S&P 500 chart is a composite of all 500 companies in the S&P 500 index.  Remember its just math!  This chart is very useful to give a 40,000-foot view of what is going on in the market itself.  To my own detriment, I can get carried away on individuals companies, while forgetting about risk reward probabilities on the market as a whole.  Maybe together (you and me), we can do a better job on this!

Model Price Chart on the S&P 500, Friday’s Close, August 3, 2012.

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

These colored lines, or our EBV lines may look simple however, these lines include all reported companies balance sheets reported up until Friday night, August 3, 2012.  As a side note, EBV+3 back in February was 1447, today its 1484.  That is 2.5% growth (retained earnings) collectively in all companies in the S&P 500 since February.  This is why our EBV lines advance over time.  This represents compound growth to you as an investor, and our charts show this compound growth over time.

So what does our Model Price Chart say?

As readers can see EBV+3 is calculated at 1484.  So from Friday’s close, 1390.99, this represents a 6% difference.  When I was on the Canadian business show “Market Call” last Tuesday, I said the maximum rally investors would experience in the US markets would be 6%.  You now know where this percentage comes from.  With all the negatives in the market, I find it hard to believe that the market has the strength to break through EBV+3.  This is what I said back in February, in my original blog about the S&P 500, and I still feel the same way today.

To make this simple, let’s use a traffic light analogy.  I would use the signal yellow to signify caution.  As this market continues to approach EBV+3, I would turn from yellow, to the color red.  I will let you know when this occurs.

Since the end of May, the S&P is to be moving in an upward direction, methodically.  It seems to me this “stair stepping” advance will continue or we rally hard to the top of the zone, or EBV+3.  I’m sure, with the S&P 500 yielding investors double-digit returns for 2012 investors will be the most bullish at EBV+3, that my traffic light will turn red looking for a correction.  Yes, I do hate quoting myself, but I also hate repeating myself as well.  As I said in my April 11, blog

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.

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