Here is our Model Price chart for the S&P500:
S&P 500 Model Price Chart, with EBV (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.
Fiscal Cliff Worries
I wrote this back on November 1, 2012.
Once the US presidential election is over, maybe 5 minutes after the victory speech, the national and international media will be clamouring 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.
After witnessing the election results maybe my 5-minute estimate was too long!
As you can see from our S&P 500 chart above the market has built in some value with the market correction from the second week of September. With last night’s close of the S&P 500 at 1409.46, this leaves a 9% “value” gap up to EBV+3 or 1537. If Washington were to come to any agreement on the “Fiscal Cliff” look for the market to rally to fill this “value” gap the market has created. However EBV+3 is still a very formidable level for this market to transit up through, in my opinion, and will likely be the ceiling for this market for quite sometime. If and when the “Fiscal Cliff” gets resolved investors can look forward to mid February as its anticipated the debt ceiling must be raised by Congress in order for new spending to occur. Investors can only hope both these issues will be resolved together so investors can ignore Washington and focus on market fundamentals.
For much of the year we considered the most likely US market scenario – S&P 500 – 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.
Financials are still a worry for me!
The TBTF banks are still trading below EBV-3, including Goldman and JP Morgan – as I noted here in a blog. I don’t know why these two institutions are having a hard time transiting through their EBV-3 levels, but they are. It is very difficult to be outright bullish on this market without their participation.
Traffic Light: Yellow
My traffic light analogy is still yellow. With TBTF banks particularly Goldman and JP Morgan still under EBV-3 as I said above plus Washington’s involvement as the market focus it is very hard to have a green signal for investors. However I do think if the fiscal cliff is resolved in a bipartisan fashion, also dealing with the debt ceiling issues, a strong market rally up to EBV+3 cannot be ruled out for the month of December. So I predict investors and portfolio managers will be on the edge of their seats from now to New Years Eve, because anyone missing this substantial rally would certainly harm their investment returns for the calendar year 2012.
I can here it now, “No Xmas holiday’s dear, I have to be on the edge of my seat, with my finger on the buy button – just in case!”