S&P 500: Black Cross On The Horizon?

I tuned in today to Minyanville today, mainly to look at the latest cartoon strip and I got educated about “Adult Friends.com”, then I watched a feed about Black Crosses.

I’ve heard about those things before, vaguely; and anyway I’ve never seen anything except good sense on Minyanville so I thought I’d check it out; particularly since I’ve been thinking quite a bit recently about how you can tell if a bubble is about to pop, and I have a long-term view for the S&P 500.

The idea is - when the 50 Day Moving Average (going down)  crosses over the 200 Day Moving Average (going up), that’s the signal there is going to be a humdinger of a bust.

Mmm…I had a look, checked out the S&P 500 and the SSE. It seemed to work OK. It’s a bit of a lagging indicator so by the time one hits you are selling on a really fast falling market; so it’s presumably a good idea to keep an eye on the road ahead.

Anyway, that was their story, which is that one’s coming!!

SO WATCH OUT!!!

I had a look at that…Mmm…I’m not an expert but it didn’t look like there is one imminent right now on the S&P 500, based on my ten minutes experience in this exciting new niche of “TA”.

It didn’t look like one on the way for Gold either which kinda goes against my theory that gold is a bubble. Me and Mr. Soros who I noticed someone called “senile” the other day. He doesn’t look senile to me, and anyway if he was going senile I think it would be a bit unkind, if not impolite to say so; but still “Gold” does generate stong emotions. Perhaps they will start calling me senile soon too?

Oh well, I thought I’d dust off the old model and have a look, I like to do that every six months or so, then I compared it with the chart I put out last May to explain why I thought the DOW would keep going up at least to 10,000:

The logic there is that I do a valuation of the stock market using an ancient  magic (secret) formula known only to Apache Indians (called International Valuation Standards), that gives what they call “Other Than Market Value” which is an estimate of where the market “ought” to be if it wasn’t in disequilibrium for one reason or another. So then I express that as a percentage so 0% means it’s valued “correctly”, 100% means it’s double the price it “ought” to be…and so on.

Looking back’ I’ve actually changed my mind a bit since then about where the “fundamental” is but anyway just for illustration.

My point then, and still is, that historically at least, it looks like  you tend not to get a big reversal when the market is under-priced which is what happens after a bubble, unless the price drifts up to above about 15% to 20% (max) undervalued (now it’s about 28% according to me).

So I’m sorry, I don’t see any great excitement coming up in the immediate future, at least until the S&P gets to about 1,200 to 1,300, if it does that there would be a risk of a 10% to 15% (max) reversal.

One caveat is: if nominal GDP starts to go seriously negative, which I doubt because although I can believe the Fed isn’t that good on generating real GDP growth, in the event they will be able to make up for that by creating inflation which is their speciality (not that they have managed to create much recently but you can tell they are itching to do that).

The big danger would be a rise in the 30 Year Treasury yield, which in my view is pretty unlikely that it’s going to go up much (I’m in a minority on that too),  but if I’m wrong on that then that would drive the “fundamental” down in which case the danger of a reversal would increase.

So my view right now on the S&P 500 etc is buy and hold good companies with long term prospects, but don’t expect fireworks. Pretty boring stuff really.