February 2013 S&P 500 Forecast Results

Financial Place Online provided a market forecast back in December.  The forecast was for the S&P 500 index to be above 1400 by 1 February 2013.  The good news is that this forecast came to be true.  The great news is that the S&P 500 is currently at 1513!   The primary concern though, is that the upward run has come too fast.  Very little of the underlying U.S. economy has changed in the last year.  The job market has modestly improved, but this is more than offset by fiscal uncertainty that may result in disaster coupled with a monetary policy that maintains the suppression of interest rates.

The 52 Week low for the S&P 500 was 1266.  Also, the index is up 100 points in the last month.  The price to earnings ratio (P/E) is a little above 17.  It is worth noting that the P/E ratio correlation to the stock market is weak as earnings growth is another factor which weighs heavily on the price of the index.  Forecasts for 2013 earnings growth are estimated to be anywhere from flat to 3%, hardly anything worth writing home about.

What may really be the cause of the run to over 1500, is the present 2.07% dividend yield.  Those who were invested in bonds found the S&P 500 dividend rate to be attractive since bond yields are low and interest rate risk is increasing.

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Time to take some gains off of the table

Bull MarketWith the S&P 500 now at 1472 investor confidence appears to be at a high.  The recent closing reinforces FPO’s forecast of being above 1400 come February 1st, but does that mean that its wise to stay in stocks?

As the investor, you are not your customer.  Your goal is to make money.  As such, if something is being made out to be an attractive buy, as stocks have been this last month, your job should be focusing on fulfilling that demand.  It is time to sell.  It doesn’t have to be a 100% move away from stocks, but taking some gains off of the table and going for what others are dumping is what the smart money is doing; by either selling into this rally or by moving all of their money elsewhere.  Attractive options include bonds, real estate, and commodities other than gold (which is still relatively high).

This principle of serving as a facilitator to the markets is close to being a “market maker”.  In the strictest definition, a market maker simultaneously buys and sells all asset classes that they participate in at their predefined spread.  They operate at a large scale of economy which is why they can command this spread, however they must participate on both ends which means bearing risks of buying assets when there may be no one to sell to.  The average investor does not operate with the economy of scale of a true market maker, but their position is better in that they can choose what they buy and sell.

Seems simple, right?  Investing techniques can be heavily determined by charts and valuation data.  In fact doing so, is an essential part to being successful.  At it’s roots, investments are made by individuals, which are subject to behavioral patterns.  Part of the basic programming here is to buy what looks attractive.  This runs contrary to money making principles, which dictate to sell what looks attractive and use the proceeds to buy something of value.

Gold vs. S&P 500

Is it better to buy gold or the S&P 500?  The answer is both.  It’s the timing between the two that’s crucial.  To understand why, it’s best to take a practical look at the two asset classes.  Gold is commonly referred to as a “store of value”.  It is what it is.  Gold has a high value due to its anti-corrosive properties, its density, malleability, luster, and ductility.  However, it does not work or generate any cash flow or grow itself additionally.  This is where stocks come in.  Stocks are a product of ownership of production.  A company brings in revenues, pays fixed and variable costs, taxes, and corporate debt.  The remaining amount of earnings, positive or negative passes to the shareholder in a mix of dividends and reinvestment into the company.  The present value (discounted at the required/market rate of return) of the sum of these earnings establish the stock price of the company, which fluctuates on a daily basis.

The chart below is a graph of the ratio of the S&P 500/Gold Price with respect to time.  This chart does not take dividends into account.

Gold vs SP500

Using this chart it is easy to see which asset outperformed the other over any period of time. Over a given time period if the end ratio is higher than the start ratio, the S&P 500 outperformed gold. If the end ratio is lower than the start ratio, gold outperformed the S&P 500.

For example, take a starting point of 1970 and an point of 2000.  The ratios are 2 and 5, respectively. Over this 30 year period stocks outperformed gold.  The ratio for 1930 is 1.5 and the ratio for 1950 is 0.4.  In this period gold outperformed the S&P 500.
There are a lot of factors that will determine price movements and based on trading activities, politics, and the economy.

Any chart theory is not definitive, and should be used only as part of a complete investment approach.  This method is based on a best value trading of the Gold / S&P 500 pair.  Stocks represent the productivity, but a commodity can become increasingly scarce.  A possible approach would be to trade based on the historic ratio bounds.  In this case rebalancing would occur based on the ratio.  At 0.2, an investor would hold 5 parts stock to 1 part gold (0.2/1:1).  At 5, an investor would hold 5 parts gold to 1 part stock.

A year of bulls vs bears

2012 has been a year packed with bull vs. bear action.  Progress in the markets and tech innovation has been countered by political and regulatory uncertainty.  FPO still projects the S&P over 1400 by 1 Feb 2013.

2012 has been a year packed with bull vs. bear action. Progress in the markets and tech innovation has been countered by political and regulatory uncertainty. FPO still projects the S&P over 1400 by 1 Feb 2013.

2012 is winding to a close.  FPO is still maintaining its projection of a S&P 500 over 1400 come Feb 1, 2013.  However, the last few days have certainly put a damper on market progress.  The prospect of hitting 1500 was too good to be true for the time being.  However, the 2013 outlook is steady, but slow growth aided largely by technology and energy.  There is still enough turbuance in the health care sector that caution needs to be exercised if weighing heavily in this sector.  There are still a handful of FPO articles slated for 2012, but there are only 2 more market days left.  Don’t forget to change your positions accordingly.

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