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Monthly S&P 500 Outlook For July 2018: Still Stuck In The Range?

Kevin Jacques profile picture
Kevin Jacques


  • For the last 4 1/2 months, the S&P 500 Index has been stuck in the 2,581 to 2,872 range.
  • C-J estimates a 16.1% likelihood the S&P 500 will end July outside that range.
  • C-J estimates an 8.5% likelihood the S&P 500 will end July with a new record high.
  • C-J estimates a 7.6% likelihood the S&P 500 will end July below the February year-to-date closing low of 2,581.

"But as we cannot predict such external influences very well, the only reliable crystal ball is a probabilistic one." - Benoit Mandelbrot

The C-J Monte Carlo Simulation Model

C-J is a Monte Carlo simulation model used to assess risk in the S&P 500. Traditional stock market models suffer from a number of problems including fat tails, serial correlation, and the failure to account for volatility clustering. The fat-tail problem arises because traditional finance theory uses the normal distribution. For investors, the practical implication of such an approach to explain movements in the stock market is that traditional portfolio theory underestimates (and in some cases significantly underestimates) risk in the market.

C-J uses data on valuation, earnings, and short-term historical patterns in the stock to correct for the problems noted above. C-J does this by using a series of non-normal conditional distributions. If you have read former Yale mathematician Benoit Mandelbrot's book (with Richard Hudson), The (Mis)behavior of Markets: A Fractal View of Financial Turbulence, then you should note that C-J is fractal by design. And while the model maintains a fractal nature, because of its design, it also maintains statistical properties similar to the behavior of the S&P 500 over the last 60+ years.

The purpose of C-J is not to provide a single point estimate of where the S&P 500 will be at some future point. As investors we don't see the process generating movements in the market, we only see the outcomes, thus explaining why "expert" predictions are often wrong. As Nassim Taleb has written in Black Swan: "Most models, of course, attempt to be precisely predictive, and not just descriptive in nature. I find this infuriating". To that end, C-J is intended to be descriptive in nature by providing not only a model that corrects for the problems discussed above but also does

This article was written by

Kevin Jacques profile picture
Kevin T. Jacques is a former senior economist with the U.S. Treasury Department in Washington, D.C. During his 14 years with the Treasury Department, he worked on topics including risk measurement and management systems, bank capital regulations, and systemic risk. In the mid-1990's, he served as staff on the President's Working Group in Financial Markets examining systemic risk in the U.S. financial system. In addition, during his time in Washington, Dr. Jacques taught finance in the McDonough School of Business at Georgetown University. Dr. Jacques’ economic and financial commentaries have received hundreds of radio, television and newspaper citations including Bloomberg Financial News, National Public Radio (NPR), PBS television, American Banker, U.S. News & World Report, and others. Currently, he teaches investments at Baldwin Wallace University. He holds a Ph.D. in Economics from Michigan State University.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I own a long position in an S&P 500 Index fund in a retirement account.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

Learner16 profile picture
Thanks again. It seems volatility is going to pick up again this summer.
Kevin Jacques profile picture
Hi Learner16,
I'm keeping an eye on it as well and looking at ways my portfolio may benefit if it happens.

Thanks for reading.

itamarro profile picture
I, for one, am happy to have some volatility back :) thank you for your consistent insightful analysis.
Eric Peterson profile picture
Thanks once again for the interesting article. If you have a chance, please take a look at my question posted on your June article.
Kevin Jacques profile picture
Hi Eric,
Sorry to be slow in responding. I teach 2 college classes in the summer, on a condensed schedule, one of those classes being investments. But what it does is make late May through early July one of my busiest times of the year, even though the academic year is over. So I did reply, albeit belatedly, to your question.
There is a good possibility of market going to touch 2500 on SPX in next two months ..

Market needs this consolidation ..
Kevin Jacques profile picture
Thanks 1575. And like some of the commentors below, whether you call it volatility or consolidation, I'm interested to see what the remainder of the year brings and whether my portfolio can benefit from any consolidation.
Interesting. Fairly substantial changes.
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