Are we confused yet? With the politicians in Washington in control of the US market it’s hard sometimes to figure which end is up. Thankfully I have my model price charts to show me the way, so I can put this market action in some context.
Yes, let’s start with our model price chart of the S&P 500.
S&P 500 Index with weekly price bars, EBV Lines (colored lines)
Remember we aggregate all companies in the S&P 500 into one chart, so we can see where the market is trading relative to its EBV lines.
With no time to waste early on December 31st, the senate passed, with the blessing of the White House, a bill to increase tax rates on the wealthiest of Americans – a clear victory for President Obama. On December 31, 2012 the market rallied almost 2% on this news. Then just before New Year’s Eve the House of Representatives passed the senate bill without amendments driving the market up again on January 2, 2013 over 2.5%. The good news is that tax rates are going to increase which President Obama campaigned on during the last federal election. The bad news is spending cuts and the debt limit increase, were not resolved in the legislation just passed. This negotiation will be considerably tougher, since the debt limit ceiling has been officially reached and cutting expenses is difficult for any politician. This show down is expected to take place in February, a mere two months away.
So where does this leave the market?
The EBV level EBV+3 is 1563 as noted on the S&P 500 model price chart above. This leaves an upside of 6.9% after yesterday’s, January 2, 2013 action. I still feel a positive transit of EBV+3 is not in the cards, which puts a ceiling on this market for the time being. A market participant still has to consider the odds of the S&P 500 going to EBV+2 or 1132 also indicated on the chart above or a fall of 23%. The last time Congress and the President had a show down on the debt limit, August of 2011, the S&P 500 came within 10% of EBV+2 after an accelerated fall. So in my opinion EBV+2 cannot be ruled out entirely as market support even though the probability of such an event is small.
What if the S&P 500 where to transit above EBV+3?
This action, a transit above EBV+3, would be in my opinion a “game changer” for this market. Just to give you some history, the last positive transit of EBV+3 was at the end of 1992! The United States, and for that matter Canada, were coming out of a nasty recession. The US fought and won the first gulf war, and candidate Clinton won the presidential election over George H.W. Bush. Also, my business partner Joe Finley (now deceased) and I started Acker Finley Inc. in October of 1992. Fond memories.
The S&P 500 had a negative transit of EBV+3 in September 2008, so from 1992 the S&P 500 was for 16 years above EBV+3. Since its’ negative transit the market, S&P 500 has been under EBV+3 for 4 and half years. So I hope you appreciate what a big deal this event would be if this were to occur. More on this in future posts.
Financials are acting well since my last Strategy Blog (December).
I was lamenting last month that the TBTF financials, chiefly JP Morgan and Goldman Sachs were still under EBV-3. During the month of December these two big financials had a positive transit of EBV-3. (Which we call “Coming out of the Blue”) This is another piece of the “Bull Market” puzzle falling into place.
Traffic Light: Yellow
My traffic light analogy is still yellow. Investors and traders still have to respect where we are trading within the zone, which the S&P 500 finds itself. With an upside of 6.9% to EBV+3 and downside of 22% to EBV+2 the glass clearly is half empty according to the market. As I have said earlier, I still think the cap on this market is EBV+3 until the market proves me wrong – and I want to be wrong! – by a positive transit of this level.
As always will be interesting to see what happens.