The S&P 500 November 2010 Performance Analysis
"Measure twice and cut once" – unknown contractor
Every profession must have its measuring stick. Investing is no different. In fact, investing has many measuring sticks. This particular lesson reveals the importance of a standard index, specifically the Standard and Poor's 500 or S&P 500. I refer to this technique as The S&P 500 Performance Analysis. If you are invested in the US stock market, the S&P 500 is a fantastic measurement tool. Knowing the S&P 500 performance history helps an investor to make an educated guess about his future investment performance. Understanding the index helps you to quantify the amount of money to put into or remove from the stock market. It also indicates when to make those moves. Knowing the historical movements of the S&P 500 takes a lot of the guesswork out of investing in the US stock market.
The graph below shows the S&P 500 over the last year. The S&P 500 data is obtained from a variety of organizations, such as online brokerages and news agencies. My personal favorite is from CNBC. Their tool is free and the charts are interactive and quite good. Simply click on the S&P 500 symbol on the home page and then click the advanced charts link. You can also get the S&P 500 data from any online brokerage by typing in the symbol ".SPX" in the stock search window.
Some investment organizations put tremendous mathematical effort into analyzing S&P 500 data. This is perfectly fine and useful. However, taking a subjective look at the price history data can be quite powerful and less time-consuming for the individual investor. Especially when this data is supplemented with other known information, such as the strength of corporate earnings and the strength of the economy.
We can see from the yearlong graph that the S&P 500 is swinging around a value of 1100. When the market is running bullish, it trends above 1100. When the market is running bearish it trends below 1100. The market first approached 1100 in October 2009. In fact for most of 2010, the S&P 500 is above 1100. Investors call this a "level of strong support". Another level of very strong support is 1050. It is also important to notice the peaks and valleys too. The market only slipped once below 1050 in early July 2010 to 1022. Recently the market pushed through 1185 after three weeks of effort and peaked at 1226 November 5, 2010.
Why did the market fluctuate so much? This requires some information that is not obvious within the chart. The reason the S&P 500 oscillated around 1100 for nearly a year is there is tension between two great forces. On one hand, corporate profits have been rising consistently and very well over the year. On the other side, the economy is growing but slowly in the US with high unemployment. Plus, Europe is struggling with growth and debt issues too. Because the US GDP growth rate slowed in the second half of 2010, the market sold off in April of 2010 and stayed low until August 26, 2010 as seen in the chart above. Once the double dip recession was taken off the table, the market rose - peaking at 1226 in November 5, 2010.
But what does this mean for your investment performance? As the S&P 500 index moves down, let us say every 40 points; make sure you rebalance your portfolio. It is the same idea for the moves up. Pick some number 30, 40 or 50 and rebalance as the market moves up. Maintaining a constant ratio of cash to equity value accomplishes this rebalancing. Studies have shown that rebalancing more than once a month is not profitable. So choose your S&P 500 numbers such that you rebalance no more often than this.
So if the market goes down and you have more cash, sell off enough cash and buy stocks to maintain your ratio. If the stock market goes up and your stock value is higher, sell enough stocks to generate enough cash to bring you ratio back to normal.
Another trigger for rebalancing is looking for levels where the S&P 500 hangs for some period of time. Recently, this level was 1185. Do your rebalancing at that point. The only problem with this last technique is it is more subjective. This subjectivity allows human emotion to creep in and that can be dangerous to profits. The important thing is to be consistent with whatever rules you adopt. Do it like religion and you will make money.
Another important feature of knowing the historical values of the S&P 500 is it gives you comfort when the market is moving down. Because of market history, you do have a good idea how low the market will go! We have seen support at 1180, 1150, 1100 and 1050. Because support was strong at 1100 any correction from 1200 is likely to be less than a 10% correction. If the market ever hits this level again, it is a strong contrarian signal to spend your cash on buying more stocks. More sophisticated investors purchase options and receive additional protection at a price.
Finally, when you combine the S&P 500 index value with an analysis of corporate price-to-earnings ratios, you can estimate very accurately if the market is over or under valued. I recently took the price-to-earnings ratios of 100 strong companies at the beginning of November 2010. Despite the recent market run, two-thirds of the companies are still below historic average, mean, PE ratios. Even at 1200 the market is still undervalued. This means that the stock market has more room for the upside. This in fact jives with economic forecasts for 2010.
Because the long-term view (one year) is positive, most investors should stay in the stock market for the long run and not make a significant move. The consensus economic forecast for the S&P 500 corporations is the index should see between 10% and 15% growth from January 2010 to January 2011. Using 1100 as the base value for the S&P 500 in January 2010, the index is fairly valued at 1210 and 1265 at the end of 2010. Further, growth should continue into 2011.
Investors should transfer money from cash and bonds into stocks at this time. Once the S&P 500 rallies to reflect actual profits for 2010, and then investors should take some profits in the form of cash. How much profit you should take depends on the actual economic conditions in early 2011. Of course if the market sells off for some reason, see this as a wonderful buying opportunity and make money for the long-term.
Corporate profits from the second and third quarters of 2010 are stronger than consensus analyst estimates by a wide margin. Therefore, expect the S&P 500 to exceed even the 15% estimate for growth for 2010. I shall go out on a limb and say that S&P 500 Index value of 1300 is quite reasonable in December or early January of 2011. Before January 2011, I shall have consensus economic forecasts for 2011 and I will advise on 2011 levels soon.
What should you get out of this review of the S&P 500 performance? By looking at the highs and lows of the S&P 500 you get a numerical feel for the percentage gains and losses for your own portfolio. As the market crosses through valley and peak levels, use these as buy and sell signals for your own portfolio. Pay particular attention to extreme values set in each month over the last year. Be a contrarian. In other words, do the opposite of what the overall market trend is doing. Being the "fool" is fun and profitable!
Do some selling as the market crosses through higher levels and do some buying as the market crosses through lower levels. Do not be all or nothing with your money. Spread your monetary moves out over a range of S&P 500 values - even when this costs extra in commissions and taxes. Using the "S&P 500 Performance Analysis" takes the gambling out of investing and shall increase your investment performance.
Rev. Henry Ward Beecher entered Plymouth Church one Sunday and found several letters awaiting him. He opened one and found it contained a single word "Fool." Quietly and with becoming seriousness, he announced to the congregation the fact in these words:?"I have known many an instance of a man writing a letter and forgetting to sign his name, but this is the only instance I have ever known of a man signing his name and forgetting to write the letter." - From Bob Phillips', "The Best of the Good Clean Jokes"
Every profession must have its measuring stick. Investing is no different. In fact, investing has many measuring sticks. This particular lesson reveals the importance of a standard index, specifically the Standard and Poor's 500 or S&P 500. I refer to this technique as The S&P 500 Performance Analysis. If you are invested in the US stock market, the S&P 500 is a fantastic measurement tool. Knowing the S&P 500 performance history helps an investor to make an educated guess about his future investment performance. Understanding the index helps you to quantify the amount of money to put into or remove from the stock market. It also indicates when to make those moves. Knowing the historical movements of the S&P 500 takes a lot of the guesswork out of investing in the US stock market.
The graph below shows the S&P 500 over the last year. The S&P 500 data is obtained from a variety of organizations, such as online brokerages and news agencies. My personal favorite is from CNBC. Their tool is free and the charts are interactive and quite good. Simply click on the S&P 500 symbol on the home page and then click the advanced charts link. You can also get the S&P 500 data from any online brokerage by typing in the symbol ".SPX" in the stock search window.
Some investment organizations put tremendous mathematical effort into analyzing S&P 500 data. This is perfectly fine and useful. However, taking a subjective look at the price history data can be quite powerful and less time-consuming for the individual investor. Especially when this data is supplemented with other known information, such as the strength of corporate earnings and the strength of the economy.
We can see from the yearlong graph that the S&P 500 is swinging around a value of 1100. When the market is running bullish, it trends above 1100. When the market is running bearish it trends below 1100. The market first approached 1100 in October 2009. In fact for most of 2010, the S&P 500 is above 1100. Investors call this a "level of strong support". Another level of very strong support is 1050. It is also important to notice the peaks and valleys too. The market only slipped once below 1050 in early July 2010 to 1022. Recently the market pushed through 1185 after three weeks of effort and peaked at 1226 November 5, 2010.
Why did the market fluctuate so much? This requires some information that is not obvious within the chart. The reason the S&P 500 oscillated around 1100 for nearly a year is there is tension between two great forces. On one hand, corporate profits have been rising consistently and very well over the year. On the other side, the economy is growing but slowly in the US with high unemployment. Plus, Europe is struggling with growth and debt issues too. Because the US GDP growth rate slowed in the second half of 2010, the market sold off in April of 2010 and stayed low until August 26, 2010 as seen in the chart above. Once the double dip recession was taken off the table, the market rose - peaking at 1226 in November 5, 2010.
But what does this mean for your investment performance? As the S&P 500 index moves down, let us say every 40 points; make sure you rebalance your portfolio. It is the same idea for the moves up. Pick some number 30, 40 or 50 and rebalance as the market moves up. Maintaining a constant ratio of cash to equity value accomplishes this rebalancing. Studies have shown that rebalancing more than once a month is not profitable. So choose your S&P 500 numbers such that you rebalance no more often than this.
So if the market goes down and you have more cash, sell off enough cash and buy stocks to maintain your ratio. If the stock market goes up and your stock value is higher, sell enough stocks to generate enough cash to bring you ratio back to normal.
Another trigger for rebalancing is looking for levels where the S&P 500 hangs for some period of time. Recently, this level was 1185. Do your rebalancing at that point. The only problem with this last technique is it is more subjective. This subjectivity allows human emotion to creep in and that can be dangerous to profits. The important thing is to be consistent with whatever rules you adopt. Do it like religion and you will make money.
Another important feature of knowing the historical values of the S&P 500 is it gives you comfort when the market is moving down. Because of market history, you do have a good idea how low the market will go! We have seen support at 1180, 1150, 1100 and 1050. Because support was strong at 1100 any correction from 1200 is likely to be less than a 10% correction. If the market ever hits this level again, it is a strong contrarian signal to spend your cash on buying more stocks. More sophisticated investors purchase options and receive additional protection at a price.
Finally, when you combine the S&P 500 index value with an analysis of corporate price-to-earnings ratios, you can estimate very accurately if the market is over or under valued. I recently took the price-to-earnings ratios of 100 strong companies at the beginning of November 2010. Despite the recent market run, two-thirds of the companies are still below historic average, mean, PE ratios. Even at 1200 the market is still undervalued. This means that the stock market has more room for the upside. This in fact jives with economic forecasts for 2010.
Because the long-term view (one year) is positive, most investors should stay in the stock market for the long run and not make a significant move. The consensus economic forecast for the S&P 500 corporations is the index should see between 10% and 15% growth from January 2010 to January 2011. Using 1100 as the base value for the S&P 500 in January 2010, the index is fairly valued at 1210 and 1265 at the end of 2010. Further, growth should continue into 2011.
Investors should transfer money from cash and bonds into stocks at this time. Once the S&P 500 rallies to reflect actual profits for 2010, and then investors should take some profits in the form of cash. How much profit you should take depends on the actual economic conditions in early 2011. Of course if the market sells off for some reason, see this as a wonderful buying opportunity and make money for the long-term.
Corporate profits from the second and third quarters of 2010 are stronger than consensus analyst estimates by a wide margin. Therefore, expect the S&P 500 to exceed even the 15% estimate for growth for 2010. I shall go out on a limb and say that S&P 500 Index value of 1300 is quite reasonable in December or early January of 2011. Before January 2011, I shall have consensus economic forecasts for 2011 and I will advise on 2011 levels soon.
What should you get out of this review of the S&P 500 performance? By looking at the highs and lows of the S&P 500 you get a numerical feel for the percentage gains and losses for your own portfolio. As the market crosses through valley and peak levels, use these as buy and sell signals for your own portfolio. Pay particular attention to extreme values set in each month over the last year. Be a contrarian. In other words, do the opposite of what the overall market trend is doing. Being the "fool" is fun and profitable!
Do some selling as the market crosses through higher levels and do some buying as the market crosses through lower levels. Do not be all or nothing with your money. Spread your monetary moves out over a range of S&P 500 values - even when this costs extra in commissions and taxes. Using the "S&P 500 Performance Analysis" takes the gambling out of investing and shall increase your investment performance.
Rev. Henry Ward Beecher entered Plymouth Church one Sunday and found several letters awaiting him. He opened one and found it contained a single word "Fool." Quietly and with becoming seriousness, he announced to the congregation the fact in these words:?"I have known many an instance of a man writing a letter and forgetting to sign his name, but this is the only instance I have ever known of a man signing his name and forgetting to write the letter." - From Bob Phillips', "The Best of the Good Clean Jokes"
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