May 2015 – Monthly S&P 500 Market Strategy Update

“To transit, or not to transit.”

Sorry Hamlet, but the S&P 500 makes your dithering look decisive. So let’s have a look at what is going on with this index filtered through our Model Price math.

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.

As you can observe the US market, as defined by the S&P 500, is now at the top of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2169) this would represent a gain of some 3%. If the market corrected back to EBV+3 (1734) investors would be suffering losses of almost 18%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

Top of Zone EBV+4

As I noted in my March comments on this very subject and should be read in conjunction with my May comments here, we could be here for quite sometime – just under EBV+4.


The best explanation I can offer is the market is waiting. “Waiting for what?” you ask. Waiting for a clear signal from something, I have no idea what, for this index to have a positive transit of EBV+4. Or conversely, sending the S&P 500 down to EBV+3 or some 18 percent lower.

Viewed simply and as a snap shot of risk/reward market metrics this hardly seems like a favorable environment for much of a reward with the amount of risk being taken. In other words, your upside is capped to EBV+4 or 3% higher (unless there is a positive transit of the same EBV+4) and the market index has to fall 18 percent to either a buy signal at EBV+3 or a sell signal if a negative transit occurs of the same EBV+3.

However, and as I have said before, we could be here – at the top of the zone – for years. So time in the market can be rewarding, in terms of dividends, and individual stock returns. Plus our EBV Lines, representing compounding growth in book value, is growing positively giving managements room for dividend increases and share repurchases while we wait for some market resolution to occur. Annual market returns, as viewed by the S&P 500 Index, can still be positive by high single digits, which maybe quite favorable compared to other risk asset categories.


There you have it. The U.S. equity market, as defined by the S&P 500 Index, is ‘boxed in’. Not enough good economic news to send the markets higher…. and not enough bad news…. I think you know the rest.

So we wait. As I noted above, the good news, if there is a silver lining is the growth in our EBV Lines, looking forward, representing positive growth in corporate America’s balance sheets giving management motivation for further dividend increases and stock repurchases giving investors a positive expectation of low single digit returns until Hamlet (sorry the S&P 500 Index) makes up its mind on where it wants to go.

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