Seeking Alpha
What is your profession? ×
Profile| Send Message|
( followers)

Linear regression best fit trend lines for the S&P 500 (proxies: SPY or IVV) drawn from the tops in 2000 and 2007, and the bottoms in 2002 and 2009, and from the pre-correction peaks in 2010 and 2011, extended to year-end 2012 suggest a year-end price range of from 1220 to 1480.

That comes in pretty much as the same range of index price forecasts made in January 2012 by a bevy of the top equity analysts, and maintained by them today. See our previous article for that list of forecasts.

This chart presents those trend lines. The data source and the regression trendline tool are from Reuters.

(click to enlarge)

In addition to the trend lines, the chart also has a dashed red line showing the conventional bear market threshold 20% below the trailing 1-year high. The index is far from that now.

Trend lines aren't predictions in and of themselves, but the do show the price center of gravity over each time period studies. Using long and short time periods, may be helpful in putting some boundaries on possible outcomes.

If we then overlay price probability cones based on historical volatility over 5-years, 1-year and 3-months, we see a wider probable price range, but substantially overlapping the price projections from linear regression.

(click to enlarge)

The volatility price ranges are agnostic as to direction, but the linear regression trend lines are not. They basically suggest that the upper 2/3 of the price probability cones are where the year may end.

Of course, anything can happen, and politicians the world over have an exceptionally good skill at messing things up. That could change the game completely.

Offsetting the lousy recent stock price action, the disappointing political leadership here and in Europe, and flagging economies with major unemployment, we have strong corporate performance with reduced leverage, reduced cost of capital in their balance sheets, and valuation multiples versus current earnings and earnings growth rates that are well below the rates at prior peaks; and dividends are growing.

That balance of issues, along with trend lines, volatility projections, and the consensus analyst forecast, puts a lot of weight on the side of the current situation being one of correction not bear (although monthly index price versus the 1-year moving average has some bear tracks that are worth watching).

If only we had a real crystal ball.

Disclosure: QVM has positions in SPY as of the creation date of this article (June 3, 2012).

Disclaimer: is a service of QVM Group LLC, a registered investment advisor. This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.