March 2014 – Monthly S&P 500 Market Strategy Update

Back from vacation, rested and ready to go.

Let’s start with an update on the US equity markets that never want to correct.  Ukraine and Crimea.  This market doesn’t seem to care; at least not today.

What does our Model Price chart look like?

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.

Simply stated the S&P 500 has an upside of almost 13% and a downside of 10%.  If and when the S&P 500 Index value gets closer to the top of the zone or EBV+4 we will become more defensive both in our cash position and our stock selection.

It’s been a great 5 years, in terms of performance, for US equity investments.  However bull markets do come to an end usually because of excessive valuation either in a rising interest rate environment or future weaker economic growth.  Knowing what EBV levels investors use to increase and decrease equity allocation is very important for large outperformance and compounding rates of return of any equity asset class.

This current bull market started at EBV+1 (March 9, 2009) and is probably heading for EBV+4 and higher.  Reducing your US equity exposure in your portfolio will be difficult when everybody is pocketing seemingly over-sized profits.  Unfortunately, if the past bull-bear cycles are any indicator – they are – these same individuals will lose these over-sized profits and much more when the US equity markets rollover to bearish declines.

If you think I just turned into a bear than you misread what I have written.  I am strategizing on the future in terms of US index levels – and EBV levels – and my future US asset allocation.  Our math driven EBV levels allow you to do this.  With all positive market action over the last couple of years, it’s only my intention to put a little crumb of thought into planning how to gracefully exit this current bull market with your (hopefully) oversized gains intact.

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