A Review Of Some Previous Posts.
As of this writing the S&P 500 is trading about 1000. You can see a good picture of this by taking a gander at yesterday's chart. This is a level that very few people thought possible last fall and last winter. I'd like to point out though that money flow analysis suggested this was a possibility even back then.
Back in November we laid out a possible scenario that has so far been pretty close to what we thought might happen although we were low on the unemployment level of 8%. Back then we said, "The 1st quarter of 2009 proves to be the the trough in corporate earnings. 2nd quarter numbers while still negative show a sequential improvement in results. By mid summer optimism that the economy has weathered the worst of it starts to seep into the investment community. Stocks which have spent about nine months trading between 850 and 1100 on the S&P 500 start to trade up as investors start to discount the possibility of a recovery by the end of the year." We said that the S&P 500 could end up around 1275 by the end of the year. We still think that is a possibility though we also think that probability suggests that we should see some pullback in stock prices as we enter what is usually a seasonally weak period for stock prices (late August-mid October).
Link: http://lumencapital.blogspot.com/2008/11/scenarios-mr-positive.html
Back in March we looked at one of our basic tenants which was "Markets will do what they have to do to prove the most amount of people wrong". We posed the question which way should the market go that would cause the most amount of pain for investors. We felt that direction was an explosive move to the upside. "The most unlooked for scenario would be a market that rockets considerably higher from here. There is a scenario that could get us to 1000-1100 on the S&P over the next year {or sooner} & 1300 by the end of 2010. This seems 'pie in the sky' but the first targets would get us only to where we were early in the fall and 1300 revisits the summer of 08." Link: http://lumencapital.blogspot.com/2009/03/variant-thought.html We felt that that 1,000-1,100 level was very possible on the S&P 500. We have reached the lower end of that level now.
If I ask the question today about which market direction would cause the most pain the answer is more mixed. Short to intermediate term the answer to what would cause the most pain would be a short and perhaps violent market correction. Longer term that answer is not so clear. There are trillions of dollars that have left the stock market that are sitting on the sidelines in money markets drawing little to no interest. I think the most pain would be for the market to not really give that money an opportunity to get reinvested in stocks.
One final note on this post. We study money flows because we feel that 1.) they are analysable and not subject to spin, that is charts don't lie. 2.) We feel that some of our proprietary studies gives us a longer and shorter term investment edge. 3.)We also believe that the study of money flows gives us an investment view that we can incorporate into the "game plan" and 4.) This discipline sets out certain probabilities that we can also incorporate into our investment approach. I would now like to make one important point. Probability is not certainty. That is there is no guarantee that probability as the most likely scenario is the one that will ultimately occur. Probability last summer led us to take defensive measures in client accounts in accordance to our understanding of their risk/reward parameters. Probability did not suggest that the markets would crash since it was impossible to know at that point that firms like AIG & Lehman Brothers would go bankrupt. We got hurt like everybody else. Similar to blackjack when you have a 19, (83% probability of winning-one deck) probability suggests that you have a higher percentage win rate than if you show a 14 (48% probability of winning-one deck). You can still lose with the 19 and win with the 14 but one is an easier path than the other. We therefore discuss probability and not predictability. We are not saying that we called the market in this post. We are saying that we believe that we have benefited this year by incorporating what probability teaches us by looking back at almost 90 years of stock market data and incorporating that knowledge into the investment management of our client accounts through the "game plan".
Back in November we laid out a possible scenario that has so far been pretty close to what we thought might happen although we were low on the unemployment level of 8%. Back then we said, "The 1st quarter of 2009 proves to be the the trough in corporate earnings. 2nd quarter numbers while still negative show a sequential improvement in results. By mid summer optimism that the economy has weathered the worst of it starts to seep into the investment community. Stocks which have spent about nine months trading between 850 and 1100 on the S&P 500 start to trade up as investors start to discount the possibility of a recovery by the end of the year." We said that the S&P 500 could end up around 1275 by the end of the year. We still think that is a possibility though we also think that probability suggests that we should see some pullback in stock prices as we enter what is usually a seasonally weak period for stock prices (late August-mid October).
Link: http://lumencapital.blogspot.com/2008/11/scenarios-mr-positive.html
Back in March we looked at one of our basic tenants which was "Markets will do what they have to do to prove the most amount of people wrong". We posed the question which way should the market go that would cause the most amount of pain for investors. We felt that direction was an explosive move to the upside. "The most unlooked for scenario would be a market that rockets considerably higher from here. There is a scenario that could get us to 1000-1100 on the S&P over the next year {or sooner} & 1300 by the end of 2010. This seems 'pie in the sky' but the first targets would get us only to where we were early in the fall and 1300 revisits the summer of 08." Link: http://lumencapital.blogspot.com/2009/03/variant-thought.html We felt that that 1,000-1,100 level was very possible on the S&P 500. We have reached the lower end of that level now.
If I ask the question today about which market direction would cause the most pain the answer is more mixed. Short to intermediate term the answer to what would cause the most pain would be a short and perhaps violent market correction. Longer term that answer is not so clear. There are trillions of dollars that have left the stock market that are sitting on the sidelines in money markets drawing little to no interest. I think the most pain would be for the market to not really give that money an opportunity to get reinvested in stocks.
One final note on this post. We study money flows because we feel that 1.) they are analysable and not subject to spin, that is charts don't lie. 2.) We feel that some of our proprietary studies gives us a longer and shorter term investment edge. 3.)We also believe that the study of money flows gives us an investment view that we can incorporate into the "game plan" and 4.) This discipline sets out certain probabilities that we can also incorporate into our investment approach. I would now like to make one important point. Probability is not certainty. That is there is no guarantee that probability as the most likely scenario is the one that will ultimately occur. Probability last summer led us to take defensive measures in client accounts in accordance to our understanding of their risk/reward parameters. Probability did not suggest that the markets would crash since it was impossible to know at that point that firms like AIG & Lehman Brothers would go bankrupt. We got hurt like everybody else. Similar to blackjack when you have a 19, (83% probability of winning-one deck) probability suggests that you have a higher percentage win rate than if you show a 14 (48% probability of winning-one deck). You can still lose with the 19 and win with the 14 but one is an easier path than the other. We therefore discuss probability and not predictability. We are not saying that we called the market in this post. We are saying that we believe that we have benefited this year by incorporating what probability teaches us by looking back at almost 90 years of stock market data and incorporating that knowledge into the investment management of our client accounts through the "game plan".
We will discuss money flows more extensively when we begin our study of risk in the fall. In the meantime, please let us know if you would like to have this concept explained to you further or if you are not a client of our firm and are interested in how we might apply our strategies to your current investment situation.
*Long ETFs related to the S&P 500 for client accounts.
*Long ETFs related to the S&P 500 for client accounts.
posted by CR English at 6:03 AM
<< Home