When I Buy And Sell The S&P 500

Includes: SPY
by: Ivan Kitov

Figure 1 shows the evolution of the S&P 500 index since 1980. After 1995, the index behavior reveals some saw teeth with peaks in 2000 and 2007. The current growth resembles those between 1997 and 2000 and from 2003 and 2007. There are two deep troughs in 2002 and 2009 which are marked by red and green lines. For the current analysis we assume that the repeated shape of the teeth is likely induced by a degree of similarity in the evolution of macroeconomic variables. The intuition behind such an assumption is obvious - in the long run the stock market depends on the overall economic growth.

Having two peaks and troughs between 1995 and 2009, what can we say about the current growth in the S&P 500? Before making any statistical estimates, in Figure 2 we have shifted forward the original curve in Figure 1 in order to match the 2009 trough (blue line). When the 2002 and 2009 troughs are matched, one can see that the current growth path closely repeats that after 2002. The first big deviation from the blues curve in Figure 2 started in 2011 and had amplitude of 150 units (from 1210 to 1360). The black curve returned to the blue one in August/September 2011. From December 2011, we observed a middle-size deviation of about 100 units.

(Click to enlarge)

Figure 1. The evolution of the S&P 500 market index between 1980 and 2012.

In April 2012, we predicted a drop in the S&P 500 to the level of 1300 by the end of May. Figure 2 shows the predicted behavior in April and May 2012, with the predicted segment shown by red line. We expected that the path observed in the previous rally would be repeated with the bottom points coinciding. When this prediction realized, we invested at the average price 1320. In May 2012,the expected exit level was 1500 in October 2013.

(Click to enlarge)

Figure 2. The original S&P 500 curve (black line) and that shifted forward to match the 2009 trough (blue line). Red line - expected fall in the S&P 500: from 1400 in March to 1300 in May.

Figure 3 shows the evolution of the S&P 500 monthly closing price between May and August 2012. The S&P 500 closing level for August was 1430 and reached 1469 in the middle of September. This level provided a ten percent return over approximately 4 months. One can see that the observed level was far above the expected level (blue line). The return and the deviation from the expected level both made us think that this was the best time to exit. We sold the index on September 21 (1460) anticipating strong turbulence (economic, financial, and political) and an overall fall to 1375 at a few month horizon.

(Click to enlarge)

Figure 3. Same as in Figure 2 with an extension between May and August.

Figure 4 shows the evolution of the S&P 500 monthly closing price in September-November 2012. The current level (October 26th) is 1411. We used it as a closing price for October and put the November's level down to 1375. One can see that the red line intersects the blue curve. The previous history of the black and red lines intersection with the blue one makes us think that the time to enter the market (S&P 500 index) is approaching. We'll definitely buy at 1350 to 1375 which is an expected level by end of 2012. This level guarantees another 140 to 170 points (10% to 12%) in 2013.

(Click to enlarge)

Figure 4. Same as in Figure 2 with an extension between September and November 2012.

Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.