As we did last week, we'll begin by reminding you of what we said back in the first week of March 2016 before you look at our updated chart showing the actual trajectory of the S&P 500 against the alternative trajectories of what our futures-based model forecast:
That's also true for the projections for the remainder of March 2016, which suggest that stock prices are in for a rough ride before recovering. However, that apparent trajectory is really an artifact of the historic stock prices we use in our model to project their future trajectory, and as such, it is an echo of past volatility, which means that our model will be less accurate until that echo subsides...
So can we predict where stock prices are likely to go next?
Of course we can!... Provided investors keep their forward-looking focus on 2016-Q4 in making their current day investing decisions, we can expect that the S&P 500 will continue to track largely sideways (plus or minus 3% of their current value of just under 2000), through the end of March 2016.
It looks like we're going to skate the upper edge of our impromptu prediction this week, and it's quite possible that the S&P 500 will poke above that range before the end of the month.
The big change in this chart from the previous version is that it now reflects the expected dividends that will be paid in 2017-Q1, which the implied forward dividend futures (CBOE: DVMR) for that distant quarter have initially pegged at 11.95 per share.
In terms of the acceleration of dividends, that future quarter is approximately on par with 2016-Q4.
As a result, the potential volatility of stock prices through the upcoming quarter will be much less than what took place during the first half of 2016-Q1, since the spread between the alternative future trajectories of the S&P 500 is narrower.
Because we're nearing the end of the quarter, let's look past it to see what lies ahead:
We anticipate that the echo of past volatility affecting the unadjusted accuracy of our model will subside in the second week of April 2016. In the meantime, if you connect the dots for the trajectory for 2016-Q4 on both sides of the echo, and factor in the typical daily volatility range of plus or minus 3%, you pretty much have what our model would forecast for the S&P 500 in the absence of the echo event.
The major market driving headlines for the week are listed below, along with our notes for the week.
- 14th March, 2016:
- In a relief for Fed, U.S. inflation survey rebounds.
- Crude drops; dollar gains with eyes on central banks - The value of the dollar is the story to pay attention to this week. Mind what happens on Wednesday after the Fed meets...
- Wall St. ends flat as Fed meeting looms.
- 15th March, 2016:
- 16th March, 2016:
- Fed seen holding U.S. rates for now, leaving door open for June hike - This is the expectation that investors had going into the FOMC's March meeting.
- Traders see fewer U.S. rate hikes after Fed forecast - This is the expectation that changed after the FOMC's post-meeting announcement.
- Dollar slides, stocks rise after dovish Fed statement - This is the outcome of the Fed's decision. In effect, the Fed acted to devalue the U.S. dollar, which is what sent stock prices up.
- 17th March, 2016:
- Fed signals send dollar lower as Europe returns - More fallout...
- Yellen steers Fed with cautious hand, despite hints of inflation.
- Dow closes positive for year as commodities rally, dollar dives - Reality check: It's good for commodities like oil and metals, and a falling dollar is good for U.S. manufacturers...
- 18th March, 2016:
- Dollar bounces but down for third straight week - ... but that's only true if other currencies don't fall as much.
- Struggling U.S. oil and gas companies eye rare financing deals - Reality check: Exotic financing schemes are an indication of distress for a firm, not strength...
- 21st March, 2016:
- Fed's Lacker says he is confident inflation will return to 2 percent - And now, the jawboning begins. The Fed is trying to reign in some of the impact of its previous announcement.
- Fed's Williams downplays soft U.S. market inflation measures: MNI.
- Dollar rises as market moves past dovish Fed rate views - Reality check: Sooner or later, other nations adapt to minimize the relative advantage of a currency manipulation.
- Fed's Lockhart says rate hike possible at April meeting.
- Stocks dip, dollar advances in wake of Fed comments.
- Wall St. ends flat as recent rally spurs caution - Technically, stock prices ended up on the day, although by a small amount.
It occurs to us that if investors were to suddenly focus on 2016-Q2, now the worst of the alternative trajectories for the future of stock prices, the S&P 500 could drop by 200 points on very short notice. Which is something that could happen if Fed officials were to regain enough credibility to have the possibility of a rate hike in 2016-Q2 taken seriously. (Despite their comments from Monday, 21st March, 2016, they're not there yet...)
Because all the other trajectories are more positive than that one, one trading strategy that an investor might consider to take advantage of such a situation, without playing around with options or shorting the market, would be to place a limit order to buy long near that level, and then sell when investors shift their attention to a more distant future quarter.
That would assume little risk from changes in expectations for future dividends or a noise event that would send stock prices on a different trajectory, so paying attention to what stock prices are doing with respect to their alternative future trajectories would be required.