S&P Touches 1100.

The S&P 500 made it back to 1100 intra-day today. I thought this was a good time to review again several of our previous posts.

"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."

In late August we weighed in on the discussion of seasonal weakness-a trend that we have spent a lot of time analyzing. This was our two cents.

...."One final thought on seasonal weakness. It is a well documented phenomena that stocks don't do well in the Autumn. However, this seems to also be the most common concern among the investment class right now. Thus we won't discount the possibility that stocks will do the exact opposite and continue their rally well into year end. Remember the old adage that stocks will do what they have to do to prove the most amount of investors wrong and inflict the most pain. From our perspective the most pain would be a sharp Autumn run up in prices. This could occur because many institutional managers are behind their benchmarks this year and there is something like a trillion dollars sitting in money market accounts earning essentially 0 return for investors. I have heard various estimates on how much money is actually on the sidelines. While the actual number may be up for debate, the number is historically much higher than average"..... Link:http://lumencapital.blogspot.com/2009/08/tsionna-post-script.html

With that being said we study markets by studying probability. This is what we said about that subject back in August.

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".

Now if we incorporated our studies of money flows (which all indicate a very overbought market at this time) and reviewed this with a mind towards probability then one could look for some weakness in the next couple of weeks that would set the market up nicely for an end of the year rally. Such a rally could (notice the word could which is different than the word-will) take us somewhere between 1150 and 1200 by year end. Not saying that will happen just that it is at least a realistic possibility and it is a more likely scenario than many would have envisioned back a few months. We've incorporated this and several different scenarios into the "playbook" for year end.

*Long ETFs related to the S&P 500 for client accounts.