Category Archives: SP 500

The S&P 500 in Week 2 of March 2016

Before you even think about looking at the chart below, remember what we said last week, when we commented upon what our futures-based model was projecting for the rest of the month.

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.

Okay, *now* you can think about looking at the chart below!

Alternative Futures - S&P 500 - 2016Q1 - Standard Model - Snapshot on 2016-03-11

So far, our impromptu forecast is holding, despite the best efforts of central banks around the world!

Speaking of which, here are the headlines that best describe what drove the market's actions in the second week of March 2016, along with our notes.

On a programming note, we'll next update our S&P 500 At Your Fingertips tool sometime next week - we're being slammed by other projects right now, where even though the BLS will be releasing its February CPI figures on 16 March 2016, we won't be able to get to it until sometime during the weekend at the earliest.

The S&P 500 in Week 1 of March 2016

We've finally gotten lucky, so to speak, with the S&P 500 behaving differently than what our futures based model of how stock prices behave would otherwise indicate!

Alternative Futures - S&P 500 - 2016Q1 - Standard Model - Snapshot on 4 March 2016

Not only is the S&P 500 appearing to defy gravity, but its trajectory over the first four days of March 2016 is so seemingly steady as to defy explanation!

But we wonder - is our model experiencing another one of those echoes that disrupt its ability to forecast? Or did our model simply get four days ahead of itself, where it projected stock prices could reach the level they did on Friday that many days earlier?

We can't answer the second question yet, but we can answer the first. What we'll do is compare what our model projected for this period back in the middle of January 2016 with what its showing through 6 March 2016. Let's animate how much the future has changed between those two points in time:

Alternative Futures - S&P 500 - 2016Q1 - Standard Model - Snapshots on 15 January 2016 versus 4 March 2016

That's seems to be quite a lot of movement, particularly for the future associated with investors focusing their forward-looking attention upon 2016-Q1, but if we look at the alternatives for the three more distant points of time in the future (2016-Q2, 2016-Q3 and 2016-Q4), we see that the likely trajectories for future stock prices depending upon which point of time in the future that investors are fixing their attention upon really didn't change that much over the last seven weeks.

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! For short periods of such apparent echo-driven volatility in our model's projections, it's just a matter of connecting the dots for the trajectories on both sides of the echo event. And for that, let's look past the end of 2016-Q1 to get an early look at what lies beyond:

Alternative Futures - S&P 500 - 2016 - Standard Model - Snapshot on 4 March 2016

That makes it easy, doesn't it? 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.

And by extension, that will largely hold true up to August 2016, where we already anticipate having to deal with another echo event in our model.

Should investors shift their forward looking focus to a different point of time in the future, stock prices will rise or fall accordingly. The only thing we can say for sure is that given where stock prices are today, should that happen, they are more likely to fall in the near term, with how far they fall defined by which point of time in the future investors focus their attention upon.

The main wild card for what we're able to project today is the alternative future associated with investors focusing upon 2017-Q1, for which we'll get a first glimpse later this month.

Looking backwards, we see only one notable market driving event in the first week of March 2016 that significantly drove U.S. stock prices: the influential New York Fed president William Dudley's assertion on Tuesday, 1 March 2016 that he was "tilting" his economic outlook to the downside, which when combined with news of economic data that was initially viewed as weak prompted investors to shift their attention from the 2016-Q1/Q2 time frame toward 2016-Q4 in a small Lévy flight rally, where it remained throughout the rest of the week.

In the days since, stock prices have only moved half as much, despite the influence of what ZeroHedge describes as the biggest bear market short squeeze since November 2008.

But as we've previously observed, that's the mechanism by which Lévy flight rallies accounted for by our futures-based model come to be.

The S&P 500 in Week 4 of February 2016

Before we get into our summary of the week that was for the S&P 500, in our previous edition, we featured a quiz where we challenged our readers to interpret our chart showing the actual trajectory of stock prices against the backdrop of the alternative trajectories of the future path it could take.

As part of that quiz, we asked one question that we had to phrase very specifically, which we'll highlight in the following quote (we'll also add the answer to the "previous question" in parentheses):

If investors were to maintain their forward-looking focus on the period of time you identified as your answer to the previous question (2016-Q4), and assuming that the projected future doesn't change and that there is no sudden onset of a noise event, would you expect the S&P 500 to rise or to fall with respect to its value on 19 February 2016 at the end of the first quarter of 2016?

Why did we have to phrase that question so specifically? As you'll see in the following chart, which we've animated to help visualize the changes that have taken place over the last week, the future itself has changed. The easiest way to see it is to simply look at the alternative trajectories on the right hand side of the chart (corresponding to the future date of 1 April 2016):

Animation: Alternative Futures - S&P 500 - 2016Q1 - Standard Model - Snapshots 2016-02-19 and 2016-02-26

The answer to the question is still the same (lower). However, we couldn't pass up a good opportunity to demonstrate the extent to which the recent evolution of stock prices can influence the likely future trajectories of stock prices.

But as you can see in the animated chart, there was one rather spectacular change in the previous week that had absolutely no impact on the actual trajectory stock prices when it happened, because investors were focusing on a much more distant future (2016-Q4) when it did.

That change is seen in the likely trajectory of stock prices associated with investors focusing on the current quarter of 2016-Q1, the end of which is still in the future. What happened is that on Tuesday, 23 February 2016, the dividend futures for the S&P 500 2016-Q1 (WCB: DVMR) suddenly increased from $11.62 to $11.95 per share. Meanwhile, there was no similar change in any of the other dividend futures for 2016-Q2 (WCB: DVJN), 2016-Q3 (WCB: DVST) and 2016-Q4 (WCB: DVDE).

That's an important thing to note, because as you can also see in the animated chart above, the actual trajectory of stock prices tracked closely along with the future defined by the expectations for dividends in 2016-Q4 from the previous week through Thursday, 25 February 2016, before breaking toward the nearer term future of 2016-Q3 on Friday, 26 February 2016.

Even though it didn't affect the actual trajectory of stock prices in the fourth week of February 2016, the change in expectations for dividends in the current quarter of 2016-Q1 has produced two positive benefits. The first benefit is that the risk of a large downward move in the S&P has been greatly reduced. The second benefit is that the market should be considerably less volatile than it was in the first half of 2016-Q1 - investors shifting their forward-looking focus from one point of time in the future to another won't have the same impact that it did earlier in the quarter.

That doesn't mean that stock prices will continue to be as apparently steady as they've been. As for what to reasonably expect in the week ahead, we'll let the chart do the talking, although we'll caution that the week ahead has the potential to be noisier than normal.

Speaking of which, here are the main market driving news events of the fourth week of February 2016.

  • 22 February 2016: Although a number of analysts worried that the that the U.S. inflation rate was firming up, increasing the potential for the Fed to hike rates again sooner than 2016-Q4, stock prices discounted the news and instead rallied on the day as investors remained focused on 2016-Q4, although closing above the middle point of the range we would expect them to fall.
  • 23 February 2016: Although the S&P 500 was initially "lifted by muscular oil rally" in the morning, oil prices fell later in the day and stock prices followed. If you look at the chart above however, you'll see that in actuality, they simply dropped down to the mid-point of the range that our model had projected they would fall for when investors are focused on 2016-Q4.
  • 24 February 2016: Following along with the 2016-Q4 trajectory, stock prices initially slipped in the day, but rebounded when Dallas Fed president Robert Kaplan indicated that he expected to downgrade his expected path of rate hikes at the FOMC's March meeting, which served to closely focus investors on 2016-Q4, and the market closed up accordingly.
  • 25 February 2016: Investors remained focused on 2016-Q4 as Richmond Fed president Jeffrey Lacker proclaimed that it was "still logical to expect rate hikes this year", but the bigger news keeping investors looking at 2016-Q4 came as St. Louis Fed president James Bullard acknowledged that the Fed's January rate hike "may have spurred market turmoil". The S&P 500 closed up on the day.
  • 26 February 2016: Although Wall Street initially responded to better-than-expected GDP data by going higher, as investors absorbed additional news indicated that inflation really did kick up toward the Fed's 2% target level in the fourth quarter of 2015, stock prices would ultimately close down as investors began shifting their attention to the nearer term future, as that higher inflation would likely drive the Fed to hike interest rates sooner. We see that change in our chart above, where investors would appear to have shifted their focus to 2016-Q3.

On a comical note, Friday, 26 February 2016 was also the day when San Francisco Fed president John Williams intentionally made the following statements:

"Although it’s understandable to want to communicate a comprehensive view of monetary policy with all of its incumbent uncertainties, the public has only so much bandwidth dedicated to central bank messaging," Williams said in remarks prepared for delivery Friday. "So, like a sledgehammer, strongly worded forward guidance can be a powerful tool when it’s needed."

Williams stopped short of advocating forward guidance in all instances, adding that "like a sledgehammer, care needs to be taken when and where it is used."

Combine those thoughts with James Bullard's comments earlier in the week acknowledging the Fed's role in sparking market turmoil and also with the knowledge that we actually use the Fed's forward guidance to check the calibration of our futures-based model for projecting the alternative future trajectories of stock prices, and hopefully you'll understand why we found the "sledgehammer" comment to be so funny, coming as it did from one of the Fed's own minions.

For more insight into the nature of forward guidance, we can recommend James Hamilton's well-versed and timely discussion of recent research on the topic at Econbrowser.

Winter 2016 Snapshot of Expected Future S&P 500 Earnings

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter. Today, we'll confirm for the fifth time that the earnings recession that began in the fourth quarter of 2014 has continued to deepen.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2016, Snapshot on 18 February 2016

In the chart above, we confirm that the trailing twelve month earnings per share for the S&P 500 throughout 2015 has continued to fall from the levels that Standard and Poor had projected they would be back in November 2015. And for that matter, what they had forecast they would be back in August 2015, May 2015, February 2015 and in November 2014.

There is some good news. Although the latest projection confirms that the earnings recession is continuing to deepen, the current estimate indicates that the fourth quarter of 2015 is the first time that the rate at which the earnings recession is deepening has begun to decelerate. As we have seen in previous quarters however, that is no guarantee that we've yet seen the bottom.

Standard & Poor's Howard Silverblatt described what he's seeing in 2015-Q4's earning reports (via S&P's Index Earnings Report Excel spreadsheet), which will only present the following comments for a very limited time (most likely, they'll be superseded in less than a week)....

With almost 90% of the Q4 2015 earnings reported, 67.6% of the issues are beating estimates (the historical rate is two-thirds), but only 36.8% beat As Reported GAAP rule based earnings estimates and less than half, 46.8%, beat sales estimates.

Explained 'responsibility' for any short fall on the cost side includes currency costs and a growing list of special one-time items (never to be repeated, of course).

On the income side, helping earnings, are the 'difficult decisions made' by companies under the heading of cost-cutting (as layoffs and location changes appear to be on the rise).


Speaking of layoffs, here's a list of those making the news on just the two days of 22 February 2015 through 23 February 2015, where the sample of just those in the U.S. indicate a wide geographic dispersion as well as a widening list of affected industries.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Updated 18 February 2016. Accessed 19 February 2016.

The S&P 500 in Week 3 of February 2016

Before we get into explaining the major market driving events of the week that ended on Friday, 19 February 2016, we're going to test your ability to interpret what our alternative futures chart is communicating. Here's the chart showing all the action that has taken place in the S&P 500 since 18 December 2015, where we've drawn a red box around the most recently completed week.

Alternative Futures - S&P 500 - 2016Q1 - Standard Model - Snapshot on 19 February 2016

Here are your test questions:

  1. Approximately how far forward in time were investors looking at the close of trading on Friday, 12 February 2016?
  2. How did their forward-looking focus change on each of the four days of the Presidents Day holiday-shortened trading week?
  3. How far forward in time were they looking at the close of trading on Friday, 19 February 2016?
  4. If investors were to maintain their forward-looking focus on the period of time you identified as your answer to the previous question, and assuming that the projected future doesn't change and that there is no sudden onset of a noise event, would you expect the S&P 500 to rise or to fall with respect to its value on 19 February 2016 at the end of the first quarter of 2016?
  5. What events prompted the changes you observe in the actual trajectory of the S&P 500 during the third week of February 2016?

The first four questions are pretty easy, or should be really easy if you're one of our regular readers!

The last question is definitely the hardest, and we don't expect that you would know the answers off the top of your head without doing some research. Fortunately, we kept track of the main market driving events that we saw during the past week, so all you need to scan through the following discussion of what we found to be the major market driving events of the third week of February 2016 (or if you prefer, the seventh week of 2016), where nearly all of the above questions will be answered!

  • 16 February 2016: After finishing the previous week by splitting their forward-looking focus between 2016-Q1 and 2016-Q2, investors shift their attention more toward 2016-Q2, with stock prices rising as a result. That rise is in part attributable to the prospect of a deal between Saudi Arabia and Russia to freeze their present oil production levels, which boosts the oil and energy sector of the market.
  • 17 February 2016: Stock prices open considerably higher, as energy and materials stocks lead the way again, as the speculation that the U.S. Federal Reserve will adopt a more dovish policy with respect to short term interest rates takes hold. The release of the minutes of the Federal Open Market Committee reinforce that sentiment, as investors push back the time they expect the Fed to next hike short term rates to the fourth quarter of 2016. Well after the market's close, comments by St. Louis Fed president James Bullard work to cement that expectation through the rest of the week.
  • 18 February 2016: The S&P 500 closes down little changed on a day with little market moving news, as investors appear to significantly discount the reported better than expected drop in new jobless claims that might otherwise have prompted them to shift a portion of their forward looking focus back toward the less distant future.
  • 19 February 2016: The S&P 500 closes essentially flat, but ever so slightly down, from the previous day's close, as investors discount the news that U.S. inflation apparently spiked in January 2016, thanks primarily to government policy-influenced increases in rent, in-patient hospital care, and health insurance costs.

So, all in all, things went just about exactly as our alternature futures model led us to suggest last week:

The good news though is that stock prices are likely to be less volatile over the next two weeks than they were in either January 2016 or in the first two weeks of February, at least in the absence of market driving news that might cause investors to suddenly shift their attention with little warning to more distant points of time in the future, which would be a good thing in the short term if that were to happen.

And so it was in Week 3 of February 2016. We'll know next week if that continued to hold in Week 4, after which, what we called the "short term" will be just about over....