November – Monthly S&P 500 Market Strategy Update

Here is our Model Price chart for the S&P500:

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

Remember we aggregate all companies in the S&P 500 Index into one chart, so we can see where the market is trading relative to its EBV lines.

As you can see from the 2nd week of September the US market as measured by the S&P 500 has been correcting from the EBV+3 line as illustrated.  No problem here, in that we predicted this market action in the spring of 2012 (here).  We thought the most likely US market scenario for the market to trade up near EBV+3 then correct in a saw tooth fashion until the market feels comfortable transiting up through EBV+3.  If the market didn’t like something from a whole host of current worries then trading down to EBV+2 is a real possibility.  This market action could be taking place for quite sometime – market rallying to EBV+3 then correcting 7 to 12% then rallying back to EBV+3 again.  However the good news is the EBV lines are positive in slope, ensuring market gains will be had to either patient holders or nimble investors taking gains close to EBV+3 and buying the dips when stocks correct as they have done at least twice this year.

November will be quite an interesting month to say the least.  Finally the US presidential election will be over.  I know I’m tired of the whole thing and will be happy with a winner.  Remember this blog and model price are about math – so it won’t surprise anyone that I have been following this election through the prism of Nate Silver’s New York Times blog fivethirtyeight.  As of the writing of this blog he is predicting an 81% chance of Barack Obama serving his second term as president of the United States.  I will go with the odds on this one.

Once the US presidential election is over, maybe 5 minutes after the victory speech, the national and international media will be clamoring about the fiscal cliff.  I have given readers a short description of the fiscal cliff (here) and even if we fall over this cliff metaphorically speaking I don’t think this would be bad at all.  The market has built in some value cushion in my estimation if something were to go wrong.  If everything were to “go right” as it were, the market in terms of the S&P 500 would rally back up to, you guessed it, EBV+3 or 1525, or almost 7%.  See the saw tooth pattern.

I know its boring but my traffic light analogy is still yellow.  The caution in this market can be viewed from the prospect of earnings season.  In the last few weeks’ investors were bombarded with earnings news and resulting in what I call price explosions and collapses depending how traders and analysts’ viewed the news.  I am sure if a trader or investor had a few collapses in their portfolio they would agree with my yellow – caution assessment.

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