When I last wrote about the S&P 500 back in August, the index certainly looked like it had a chance it would fall back to support or EBV+3. Circumstances or should I say non-events namely the US Federal Reserve NOT increasing short term interest rates in September has given this index a lift in valuation.
Since the end of September the S&P Index has lifted back to where it has been for much of 2015, hugging just underneath EBV+4.
Have a look.
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 equity market, as defined by the S&P 500 closed Monday, November 2 at 2104.05. If the market rallied to EBV+4 (2214) this would represent a gain of some 5%%. If the market corrected back to EBV+3 (1771) investors would be suffering Index losses of almost 16 %.
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 – one of our EBV Lines, either positive or negative, this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.
Back at the Top of the Zone
The market variability or correction in the last week of August and all of September was, of course, another opportunity for ‘buy the dip’ investors to acquire companies at discounted prices. We ourselves were excited to have this market correct back to EBV+3 and predicted in my August blog that if this were to happen a big tradable rally would occur off this level.
The rally obviously occurred without the S&P having to seek out support at EBV+3. Maybe the US Fed should be credited with the increase in valuation by continuing their accommodative monetary policy that some say is inappropriate for the current tight labor markets and other strong economic related data points.
Of course, others are pointing to sluggish, if not weak, economic data not only in the domestic US economy but also internationally as a reason to stay accommodative and not increase interest rates.
Reasonable men and women can either agree/disagree on where the US economy is headed and what the appropriate monetary response should be. Unfortunately, when the debate rages on at the highest floors Federal Reserve Board this can be disconcerting for the market participants and asset prices alike.
From a point of view of day-to-day the market may seem random or nonsensical: But it isn’t. As displayed in our Model Price chart the S&P 500 Index is trading between EBV+3 and EBV+4 is logical and rational to those of us with ‘Left Brains.’
Will the S&P 500 Index have a positive transit of EBV+4 in this economic uncertain environment? Probably not. So EBV+4 becomes resistance and a big barrier for the US market to go higher in terms of valuation.
Will the S&P 500 Index have a negative transit of EBV+3? Again, probably not. The economics aren’t so bad that equity valuations can drop precipitously triggering a negative transit (of EBV+3) indicating deteriorating economic fundamentals in the future.
So we sit and wait.
The Fed in its last meeting in October is talking tough again and threatening to hike short-term interest rates in December.
And with the S&P 500 climbing to the top of the zone and closer to EBV+4, doesn’t this spell trouble if the Fed actually went ahead with its tough talk.