October – Monthly S&P 500 Market Strategy Update
October 15, 2012
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I’m having fun with third quarter earnings however I had several requests to do an October update of the US markets. I do this by looking at our Model Price chart on the S&P 500 Index. Remember we aggregate all the companies in the S&P 500 Index into one chart, so we can see where the market is trading relative to its EBV lines. Also, I have written throughout the year on my thoughts of what would happen and I have linked these blogs at the end of this blog so quoting from previous blogs won’t get too onerous.
Here is the current Model Price chart on the S&P 500.
S&P 500 Index with weekly price bars, EBV Lines (colored lines)
This chart includes the close of the S&P 500 on October 12, 2012 of 1428.59 and all available financial information for each company in the index. Our calculated Economic Book Value (EBV) line or EBV+3 (red line) is 1510. So as of Friday’s close, this represents a potential upside of 5.7%. Also note the EBV+2 level, which we calculate at 1093 or -23.5% potential downside. The other item of note on our chart, which I have included, is EBV+3 one year from Friday’s close or October 12, 2013 or 1671. This represents a potential upside of 17%, taking Friday’s close of 1428 and comparing this level to the top of EBV+3 one year from Friday’s close. How can we do this? Simple we add earnings estimates less dividends to the net worth of each company in the index and calculate this level. Obviously company specific corporate actions could have a small impact on our projected number, however what we are looking for is some sense of potential upside and downside when evaluating the market just as we evaluate a stock for a trade or investment.
Traffic Light – Yellow (Caution)
No change in my traffic light analogy.
Links to my blogs on Market Strategy Update: