September – Monthly S&P 500 Market Strategy Update

OK, back from vacation.

When I’m away from my model price charts’ for a while – like I was last week, this rarely happens by the way – the upside of the internet, I usually start the process of reviewing individual company charts by looking first at our index charts.  I have reproduced our model price chart for the S&P 500 below.

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

The question I ask myself, where is the index value in the zone?  If the index is at the bottom of the zone the risk reward, index wise, is in your favor.  If the index is at the top of the zone, there is more risk than reward and this should color all the company charts that I review.

Over the last month of August the US market has been what I call “melting up”.  The market seemed to be going up fractionally everyday in August much to the chagrin of the bearish investors and bloggers.  You can also note the size of the weekly price bars and how small they appear.  Investors seem to be taking “baby steps” in pushing the market higher.  Fearful the bottom of the market will fall out anytime a European official or an economic data point increases the odds of a fall recession.

Just as a reminder, this S&P 500 Index chart is an amalgamation of all 500 companies in the S&P 500.  We do not calculate a model price for the index, because the only relevant information to us is where the index value is relative to the EBV levels.  As you can see, EBV+3 (red line) is slightly above where the S&P 500 is currently trading.  This presents investors with the same three scenarios I wrote about on February 24, 2012.

Three Scenarios

Scenario Number One; the S&P 500 could break up and through EBV+3.  This we think would be the most unlikely scenario.  We are still in a very uncertain financial situation with a lot of issues unresolved.  And more specific to our model price work the large US financials, Citi, Bank of America, Goldman, and JP Morgan are what we call “in the blue”.  These massive financials are trading under EBV-3 for those new to our work or at a discount to their reported book values.  To me this sounds alarm bells.  Something is wrong here.  The market is discounting these companies for a reason, which we may never know why?  I find it impossible the market can have a positive transit above EBV+3 without these financials trading above EBV-3.

Scenario Number Two; the S&P 500 goes to EBV+3, and uses EBV+3 as support for sometime until the market gets a green light to break out of EBV+3.  This at best is our most bullish scenario.  From the close on September 4, 2012 (1405) to EBV+3 one year out (1647) this represents a potential gain of almost 18%.

Scenario Number Three; the most bearish case, is that the market falls to EBV+2 or 1077.  Which is 23% from the close on September 4, 2012. The good news is that the projected EBV+2 one year from now, with the growth of the balance sheets, would be 1193 or a fall of 15%.  Better, however still painful.

What is the most likely scenario?

Traffic Light – Yellow (Caution)

In my August 6, 2012 blog I presented readers with my traffic light analogy.  I stated the color of the traffic light would be yellow for caution.  Long story short I would still would suggest a yellow caution light.  As the market rallies up to EBV+3 or 1487 my traffic light would turn red.

Investors and traders are playing with a market, which has limited upside potential (Index wise) and could correct at anytime.  As I have said in previous posts I would definitely buy the dips on the best quality securities as this market corrects.

One other item investors should keep their eye on is Apple.  If there is one stock in this market that is the leader or bell weather it’s Apple.  Here is our model price chart on Apple.

Apple Computer with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of AAPL subsequent to this post will be maintained on Facebook, here.

Apple represents 5% and is the largest weight in the S&P 500 index weight. Isn’t it cool that both the S&P index and Apple are at the “top of the zone”?  As readers can see the last time Apple traded up to EBV+6, in April, the stock corrected to the middle of May.

This will be an interesting next few months.

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