Picking a New S&P 500 Target

Back when the S&P 500 was much higher, I announced my target for this index was 1000. From my July 15, 2008 post Shooting the Messenger:

I see the S&P 500 dropping to 1000 by the end of the year. The P/E ratio is still too high as corporate profits are declining. I plan on staying short until this target is reached. At which point, Ill lock some gains and move to fixed income.

Then Hanky Bernanke put a ban on shorting financials and I knew from history this meant a false bottom would be set into the market. This idiotic action caused me to lower my target to 900 on September 28, 2008. From the post Can I Have Another Piece of Chocolate Cake?:

The bailout may provide a little bounce, but it wont hold. The deleveraging of the largest credit expansion in history will continue. My target for the S&P 500 was 1000. Now Im lowering it to 900. If your 401K is in equities, either move your money to fixed income or get ready for a punch in the nose.

Last Friday my price target for the S&P 500 hit. The market closed at 899. I tried to exit half my short positions, but I didn’t read the Grizzly Short prospectus and was two hours late putting in the sell order. Lesson learned.

Since Friday I’ve seen even more shenanigans going on with bailouts. None of the bailout steps I’ve seen taken will bring an open and honest accounting standard. There is no trust, nor should there be. My original target for the S&P 500 was based completely on earnings. I felt and still do that P/E ratios are still too high, especially as the economy slows. My estimates were not based upon a credit crisis caused and fueled by continued dishonest accounting.

Bernanke and Paulson seem not to grasp an important fact about the success of America. One of the main reasons America is successful is because we protect the interests of the investors through open and honest accounting standards. It is never perfect, but when a problem surfaces, we fix it and fix it first. This attracts the capital needed to grow our economy and help America prosper. There is big problem in the credit markets and until there is transparency it is only going to get worse.

I am not holding a single share of stock until this nonsense stops. It’s like playing Monopoly with a 4 year old. This is not a safe climate for investing. We are no different than Venezuela at this point as we nationalize banks, Freddie, Fannie and AIG. You want to invest your retirement in this environment? Not me. Why try and bottom guess this market? Fixed income is the safest place to be.

I now need two new S&P 500 targets. A honest target and a shenanigans target.

The honest target assumes all the games stop and bad banks are closed and healthy banks are allowed to pick their bones clean. The sooner America comes to its senses on this, the sooner the recovery can begin. And if we show leadership before Europe and Asia does, then we can attract global investment first.

Sovereign Speculator ran the numbers in the post Stocks are very expensive. Mr. Market is still in denial.

Looking at past episodes, the odds are strong that Mr. Market pays less than $12 per share for 2008 earnings by the end of 2009: an index value of 588 using our 08 estimate.

Using Elliott Wave analysis, Mish from Global Economic Trend Analysis comes in with a similar number.

The target of 600 is an estimate based on an approximate retrace of 62% of the peak of Wave B (.38 * 1576 = 599).

What are my new S&P 500 targets? My honest target is now 800 and my shenanigans target is 600. And note that this target is not when I go long. It is the target on when I’ll move out of my short positions and fully into fixed income. Until the 20 Week Moving Average exceeds the 50 Week Moving Average by 1% and we have honesty again, I will not go long.


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  1. The Monopoly analogy of the Shenanigans is dead on. Don’t you hate it when you own more than half the board in Monopoly against two competitors and they gang up on you. Let’s say competitor A lands on your Boardwalk with a hotel. By rights, he should be forced to come up with the money, or sell everything at MARKET prices to pay you. Instead, he first sells all his ASSETS to competitor B for the grand total price of $1. Then he pays you the $1 that he has left and exits the game. Competitor B now has an unfair advantage.

    That is exactly what happens in this country every time another bank goes out of business. JP Morgan pretends to be chivalrous as they made a back room shady deal with Sheila Baird of the FDIC. They take the Assets (deposit accounts), and leave the huge liability side of the failed bank for the taxpayer to clean up the mess. If that’s not 4 year old Monopoly, I don’t know what is.

    I’ll refrain from an S&P target, but instead remind everyone of a famous quote:

    “The markets can remain irrational longer than you can remain solvent.”

    The fair value for the S&P is certainly lower, but I’m just not willing to throw to much of my money against the market because there are to many bozos changing the rules of this Monopoly game virtually every other day.

  2. I threw out fundamentals a long time ago …along with economics …except as reassurance that things are broken and over-valued.

    That leaves technical analysis, which tries to interpret patterns. It is based mostly on investor psychology, but is far from an exact science.

    Currently the S&P is forming a triangle however, with tend lines converging above and below. When this finally breaks significantly through the trend line it should go screaming one way or the other.

    Odds favor a break down …and it usually marks the half way point to the bottom. Depending on the speed the market moves, the time target is Tue-Thur this week.

    This would make your new targets about right …and they could be hit in the next couple of weeks. At which point we get a serious bear rally for a few months.

    The alternative is to break up out of the triangle and start the bear rally immediately.

    Unfortunately this volatility is exactly BECAUSE of the accounting uncertainly you pointed out MAS.

    Also unfortunate is that these kind of moves are indicative of a continued bear market …the last time we had moves like this was 1929 to 1932. The top 9 of 10 percentage moves were in these years …the other one was last week!

    Disclosure: I’ve been in cash for over a week now …just afraid to wake up to a huge gap (up or down) and have my head handed to me. On a serious break of the triangle I will start trading again though (with the trend, long or short).

    Warning: Wait for a significant break if you play this …the pros love to pump it OVER the trend line and then reverse hard to fake you out.

  3. Agreed. This could shake like crazy. I’m still playing the P/E valuation model. Mauldin’s last newsletter stated “the 2009 P/E projected ratio is 20.2. That is not a level from which major bull markets are launched.”

  4. Hmmm …after rereading I think I had one paragraph that was a bit ambiguous:

    “Odds favor a break down …and it usually marks the half way point to the bottom. Depending on the speed the market moves, the time target is Tue-Thur this week.”

    What I meant was that the triangle or flag marks the half way point (which we are in at the moment). When it breaks the triangle it is hard up or hard down.

    Also, I think the turn date is actually Thur +/- a couple of days. I follow McHugh and Denninger most closely …and McHugh’s turn date is Thursday …the last turn date he had was spot on, but as indicated this is an inexact science (and could even go the other direction). Regardless, it should be an interesting week!

    Finally, I have immense respect for Mauldin, as I think you do. Given the PE estimate of 20.2 you mention, I couldn’t agree more that there is more downside potential. Analysts are notoriously optimistic, which means that the “E” (i.e. earnings) will probably be lower than they predict. A good bear market bottom should produce PEs in the 8-12 range …and 20.2 might be a low estimate for 2009 given the probability of optimistic analysis. So just doing the math, cutting the “P” in half (i.e. stock prices) might not get us there if earning disappoint …ouch!

    This would be the “gates of hell opening” scenario (S&P spiking down into the 400s). This is economic Armageddon, which no rational person wants. And it sounds like tinfoil talk, but that’s the math. It fit’s McHugh’s analysis though, which says after the next bear rally we have another devastating leg down in 2009, which sets new lower lows.

  5. Jim – I too follow Denninger. Watched his weekend video this morning. Good stuff. I’ve learned a lot from him. I’m going to start looking over McHugh’s stuff as well. If Karl respects him, then that says a lot.

  6. There are 2 more ways to try to determine a bottom that occurred to me lately:

    1) The M pattern on the S&P (with peaks in 2000 and 2007) predicts that all growth back to the base gets wiped. The base of the pre2000 rally started in 1995 at ~450.

    2) The absolute worst case scenario is to look at the GD and determine how many years get erased after the crash from the parabolic blow-off. The trough in 1932 (on the DOW) wiped out 30 years of gains. Wiping 30 years off the S&P puts it at ~100 and the DOW at ~800.

    Both of these statements sound like tinfoil, but the first is basic technical analysis and the second is just a fact. In fact, there was another crash similar to 29-32 around 1840 that also wiped 30 years.

    I just bring this up because 600 on the S&P may prove conservative by the time we are done. On the other hand, I hope I am DEAD WRONG. I hope we bounce at 600 never look back …I don’t even want to imagine what the S&P at 100 implies. It is the stuff of nightmares.

  7. 600 is my target for not being “all in” on the short side. That is when I move to a move neutral position. 450-500 seems possible. An S&P at 100 is Mad Max, which means canned food and firearms.

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