Chart Talk {02.13.18}
Today we're showing a longer term weekly chart of the S&P 500. This is the actual index and not the ETF. The chart is from Tradingview.com although the annotations are mine. We are like most investors trying to picture a roadmap for the coming months. One of our preferred methods is what we call the Cone of Probability. It is a probabilistic area based on a wide variety of inputs where we think markets have a potential to trade over a certain period of time. You can read more about the Cone of Probability here. Also you can double-click on this chart to make it larger.
One way we view this is to take earnings estimates and project out a probable range based on various Price to Earnings {PE} ratios. To do this we've taken the current estimates for 2018 and 2019 and applied them to a chart of the S&P 500. 2018 has a current analyst earnings estimates around $154.00 and is pictured on the above chart in green. Analysts are currently looking at about a 10% earnings increase for 2019. If that would end up being correct then earnings would come in for 2019 about $170.00 and we've plotted this above in red. Please note the trading lines we've shown on the chart don't exactly correspond to the numbers. They are close but also take into account various levels of support and resistance that we can find on the charts. Also the blue line you see running across the chart is the trendline dating back to the 2009 market lows. It is here solely for reference.
First up we'll take a look at 2018 estimates. Assuming we come in around $154.00 and assuming the economy continues to move along as planned then a PE range of 15 to 18 times earnings seems reasonable. In that case we've plotted in green the various levels where stocks could trade. A 15 PE in this year's earnings would equate to about a 12% drop for stocks from current levels. An 18 PE would equal a gain from here of about 6%. A 12-15% drop in stocks is well within the historical range in any given year we can see for the markets. Remember last year was an extraordinarily low year for volatility.
If we look out to 2019 and again assuming the estimates hold at these levels or perhaps come in a bit better then a 15 PE on a $170.00 earnings estimate is about 3% lower from here and a 17 estimate on that number is about 7% higher from where we're currently trading.
Obviously these numbers are not set in stone. Earnings could come in better or worse or stocks could trade at PE levels higher or lower than what we're showing above. I think though it helps to have some sort of roadmap on what we could expect as the year progresses. The analysis above gives you one of the methods we attempt to do that.
If we look out to 2019 and again assuming the estimates hold at these levels or perhaps come in a bit better then a 15 PE on a $170.00 earnings estimate is about 3% lower from here and a 17 estimate on that number is about 7% higher from where we're currently trading.
Obviously these numbers are not set in stone. Earnings could come in better or worse or stocks could trade at PE levels higher or lower than what we're showing above. I think though it helps to have some sort of roadmap on what we could expect as the year progresses. The analysis above gives you one of the methods we attempt to do that.
posted by CR English at 9:10 AM
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