June 2013 – Monthly S&P 500 Market Strategy Update

Life and equity markets are so much easier above EBV+3!

Sorry, maybe I’m getting ahead of myself for the new readers or beginners.  In my last Market Strategy Update blog – I highlighted “the market” as defined by the S&P 500 Index had a positive transit of EBV+3 (red line).  (See Economic Book Value under Key Concepts)  Of course I was predicting for most of this and last year, in this blog, “the market” would have a hard time making this positive transit.  Well there was nothing “hard” about this transit; it was like the proverbial hot knife through butter.

Let’s have a look at our updated S&P 500 Index model price chart.

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

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

For those who missed our long-term model price chart in previous blogs, I have included this chart as well.

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

S&P 500 Index with monthly price bars and EBV Lines (colored lines)

Remember we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

The US Equity Market is in a “New Zone”

The earth moved. Did you feel it?  Most investors will be oblivious but the risk and reward of the US equity markets have changed.  The S&P 500 had a positive transit of EBV+3.  What does this mean?  There is a new zone within which “the market” will trade.  The boundaries of this new zone will be EBV+3 and EBV+4.  In other words, the risk and reward of the US equity markets have changed.  The risk, if you will, is the equity markets falling back to EBV+3 or 1586 – as I have illustrated on our model price chart above.  From the close of the S&P 500 on May 31, this represents a fall of 2.74%.  This quantifies your US equity market risk.  The potential reward is obviously EBV+4 or 1984.  This represents an upside of 21.7% or again quantifies your reward.  Putting these facts another way, would you risk 2.74% of your money to make a potential 22% in today’s dollars.  Keep in mind the balance sheets of the companies in the S&P 500 are compounding so one year from the end of May or May of 2014, EBV+4 will be 2192 or 35% higher than the close on May 31, 2013.

Folks this is a good deal!

Yes, I know I’m repeating myself but it bears repeating, this is the first time the S&P 500 Index has had a positive transit of EBV+3 since mid 1992!

So what does this mean?

Speaking plainly, this marks the starting point of a secular bull market in large capitalized US equities.  I can clearly state that we don’t know the length nor the height – in terms of valuation (EBV+5 perhaps) – of this coming secular bull market but at least you have been duly notified of its beginning.  Yes, May 2013.

So back to my first line, “Life and equity markets are so much easier above EBV+3”.  I know this my sound weird but the US equity markets do feel lighter and less tense and for a period of time in April and May the US equity market went up everyday.

Trust and the Equity Markets

I know you have lost faith in the equity markets.  Some of you have sold your equities for good.  We have witnessed or participated in two equity crashes in the last 13 years.  In 2008, the US financial crises shock the confidence of every man, woman and child trying to save for retirement.  I understand and have empathy for your lack of confidence.

But the US equity numbers are on your side!

Finance isn’t a crapshoot.  It’s about the math.  Unfortunately the world of finance doesn’t have the math that we do, so let our math help you achieve higher rates of return on your savings – in other words, large cap US equities are worth a look again.

Conclusion

As the business press points out with the occasional market prognosticator the US equity markets are up a long way.  From the bottom of March, 2009 the S&P 500 is up some 144% without dividends reinvested.  Some even use the word “bubble” just to scare unsophisticated investors or give comfort to those who sold their equities at the market bottom back in March 2009.  However let ModelPrice Guy give you another mathematical fact that certainly should counter any bubble talk.  The S&P 500, in terms of valuation, hasn’t been this cheap for the last 21 years!  Yes, the US market is up a sizable amount, but still very cheap by historical standards.  I guess this shows how far the market went down in 2008 and we have just recovered from these market lows to a more normal market valuation level but still cheap.

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