October 2013 – Monthly S&P 500 Market Strategy Update

Talk about cross currents!

Syria on, Syria off, Tapering on, Tapering off and US Government shut down on….

In this seemingly binary world the only thing that doesn’t care are the US equity markets.  The word that most represents what is going on and strikes the fear of every market participant is Complacency.

As usual let’s have a look at the S&P 500 Model Price chart.

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

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

As a reminder 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.

You can observe from our model price chart the S&P 500 closed at 1693.87 on October 2, 2013.  EBV+3 is calculated at 1605 for the month of October.  This represents a potential gap of 5.25%.  This represents the risk in the US equity markets.  In other words the S&P 500 Index could fall 5%, fall to support (EBV+3), at anytime or not at all.

Why hasn’t the S&P 500 fallen to EBV+3 already?

Good question.  I know several clients who sold or reduced equity positions last December on the potential US Federal government shutdown only to see the US equity markets climb healthily without their participation.

So I kind of see a stand off.  Those in the equity market saying “Why Sell?” – especially those who sold last time – and those out of the equity market are saying “Why Buy?”.

This tug of war will probably continue until certainty begins to develop on the political front or the economic front.  Keep in mind we are a week or two away from third quarter earnings news – I know, third quarter already! – that will be the main driver of stocks both up and down.

Until then, enjoy the political theater (or yelling if you prefer), baseball playoffs and if you’re Canadian, an early Thanksgiving knowing that the market downside risk as gauged by where the S&P 500 Index, relative to our calculated EBV+3 (red) line, is manageable.

Yes, I guess…. Call me complacent as well!

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