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9/14/12

10% return since May, but time to halt


In April 2012, we predicted a drop in the S&P 500 to the level of 1300 by the end of May. Figure 1 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, I invested, say, one unit at the average price 1320. The expected exit level was 1500 in October 2013.

Figure 1. 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 2 shows the evolution of the S&P 500 monthly closing price since May 2012. The current level (September 14th) is above 1465 with the overall return of 10% during the past 4 months. One can see that the observed level is far above the expected one and the level, when repeating the blue curve, may have a small correction in December. Both these observations make me think that the time to exit and capitalize is approaching. I’ll definitely sell at 1500 or by the end of October. Bonds are looking more and more attractive as a safe haven till the new S&P 500 rally due in spring 2013.  

Figure 2. Same as in Figure 1 with an extension between May and August.

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