It’s good to be back from vacation. Granted, it has taken me a few days to adjust to a new (old) time zone and lack of sunshine.
It has been a tough five years or so in Southern California so when the ever-ubiquitous flat panel televisions in public areas scream the steady drumbeat of the “Dow” making new highs people seem to listen and make rhetorical comments. Yes, you have heard them all; “This cannot last!”, “It’s a bubble!”, and my favorite “Why is the market going up?” to no one in particular.
Model Price math to the rescue!
So what is going on?
First, let’s have a look at our Model Price chart for the S&P 500. Remember this chart is an amalgamation of all 500 companies in the S&P 500, on a bottom up basis, aggregated by market capitalization.
S&P 500 with weekly price bars, EBV Lines (colored lines).
Since mid November the S&P 500 has rallied up 15.56%, to within 20 S&P points of our EBV+3 line. If you have been following my monthly S&P 500 Strategy blogs over the past year,(here, for instance) I have outlined many times that a market rally up to EBV+3 was the most likely market probability. So far as we are concerned this is what we expected from the market and it occurred – so no big surprise here! What will be interesting is what the market will do from here.
Let me go through the scenarios
Scenario 1. The market will “squeeze” up underneath EBV+3 and accrue gains as the growth in the EBV +3 occurs as you can see in the naturally upward slopping EBV line illustrates growth in the underlying companies balance sheets. This “squeeze” could last days if not months. Volatility will be reduced as the market patiently awaits economic news to move the market in one of two directions or scenarios.
Scenario 2 (a). The market corrects anywhere underneath EBV+3 line. Obviously the bad economic news can and will come from anywhere, but any correction would be a buying opportunity for a subsequent rally back up to EBV+3, wherever the EBV+3 value is at the time of the rally. I call this a “saw tooth” action, which can and will be repeated many times until the market is confident to have a positive transit of EBV+3.
Scenario 2 (b). The market, or the S&P 500 Index breaks out or has a positive transit of EBV+3. As I have said many times this transit would be very bullish indeed. The last time the S&P 500 had a positive transit of EBV+3 was back in mid 1992. This breakout foretold one of the largest and longest bull markets in recent recorded history from mid 1992 to April of 2000.
What is my guess in Scenarios?
I do not believe the timing is right for a positive transit of EBV+3. Why? With a couple of decades of market experience and a guess, I think it’s too soon for a major positive transit with this current market. Usually markets like to fool around, with major levels (EBV+3 is a major level) before a transit occurs. Also major transits, like the one we are anticipating, usually occur when investors/traders are not paying attention – say middle of summer or August. Just saying, and I’m giving you my best guess.
So the high probability trade, if you will, will be the market doing “nothing much” to a market correction highlighting my “saw tooth” pattern I have outlined my times before.
In summary, we are not surprised in the daily “new highs” which are occurring just underneath EBV+3. I have predicted a “high probability” course of action for the S&P 500 based on our model price chart for the short and intermediate future. In Part 2, I will directly answer the question, “Why the US stock market is going up!”.