S&P 500 Hits 2000, Now What?

Posted by Lance Roberts - The X-Factor Report

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On Monday, the S&P 500 hit 2000 for the first time ever. This target was something I laid out very early this year following the Federal Reserve announcement in December that they would begin tapering the current Quantitative Easing (QE) program.  To wit:

“This is something that I discussed previously .  The chart below shows the historical correlation between increases in the Fed’s balance sheet and the S&P 500. I have also projected the theoretical conclusionof the Fed’s program by assuming a continued reduction in purchases of $10 billion at each of the future FOMC meetings.”

If the current pace of reductions continues, it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year.  This would imply an 8% advance for the market for the entirety of 2014.”

(**Note: for those interested in Sector Analysis Lance’s current has 8 charts & 4 Tables HERE – Editor Money Talks )














Note: The chart has been updated to current balance sheet and market figures.)

Following last week’s conclusion of the Jackson Hole Economic Symposium, Janet Yellen did indeed confirm that current round of Quantitative Easing will be completed by October.  Via Bloomberg:


Next Stop 2100

Now that my target was achieved four months sooner than anticipated, and given that the Federal Reserve is on course to raise interest rates by mid-2015, the question is now “what next?

[For the record, no one really can forecast the future. These are just “best guesses” based on current data trends and are subject to exogenous shocks that change the underlying market dynamics.]

The chart below shows the current trend of the S&P 500 from the 2009 lows until present.















The orange dashed line shows the trend of the market from the 2009 lows through the initial market correction in 2010 following the end of the first round of QE. Very quickly, Bernanke figured out that the economy was far too weak to operate without support, and he quickly launched a second round of QE in September of 2011. However, the damage was done as the market broke the previous bullish trend line turning that previous support into permanent resistance.

The market was able to establish a new trend (blue dashed line) which became successful support during to declines in 2012 as the markets struggled with the demise of QE2. If you reference the first chart above, you will notice the Federal Reserve’s balance sheet stagnating for several months along with the market.

At the end of 2012, the markets and the economy were faced the onset of the “dreaded fiscal cliff.” Part of the debt ceiling negotiation in the summer of 2011 was the creation of the “Budget Control Act” which contained a trigger for automatic budget cuts, and tax increases, that would be triggered in January of 2013.  Again, with the economy still running well below par, Bernanke acted quickly to provide enough liquidity to ensure financial and economic stability as the cuts and tax increases were enacted. The negative consequences of the “sequester”were much less than anticipated, and the deluge of $85 billion a month in liquidity ignited the markets into lift off establishing an accelerated trend higher (red dashed line.) Despite the successive push of liquidity into the markets, the S&P 500 has been unable to break above the overhead resistance of the longer term trend lines.

Based on this analysis, it is highly likely the markets will indeed drift higher within the current channel due solely to existing momentum. If this analysis is correct, it is likely that the markets could work their way towards 2100 by April of next year which would equate to an additional 5% gain from current levels.

Forecast Not Without Risks

1) There is no guarantee that the economy is strong enough to survive without the ongoing support of the Federal Reserve. After an extremely dismal Q1, the economy experienced a snap-back in Q2. The question of sustainability of that growth has yet to be answered.

2) Farmer’s Almanac, the 198-year-old publication that correctly predicted the past nasty winter while federal forecasters blew it, are predicting more of the same for the coming season. “Polar Vortex’s” are already likely farming and will be impacting roughly three-fourths of the U.S. this winter. Considering Q1 took more than a 2% plunge, WITH the Federal Reserve pumping in billions of dollars, it begs the question of how bad it could get without support this winter?

3) As I pointed out recently, the Mid-Term elections could pose a threat.

“The markets like ‘gridlock’ in government as it eliminates the risk of adverse fiscal policies. However, there is a rising probability that conservative Republicans could gain control of the Senate while maintaining majority control of Congress. The impact of such an outcome could be negative for the markets as it increases the probabilities of drastic cuts in government spending, reductions/reform of entitlement programs, and potential repeal, or ‘fix,’ of the Affordable Care Act (ACA).  While moves to a more fiscally responsible government would provide longer term benefits, such actions would likely trigger an economic recession and stock market correction.”

4) Geo-political risks are still very prevalent and potentially getting worse.

5) The contraction of both the Eurozone and Japanese economies, along with the slow-down in China, is likely to weigh on the domestic economy and corporate profitability.

However, beyond those risks is the realization that the markets are very extended as the current bull run has leapt ahead unabated by a correction. The first chart below shows the S&P 500 on a weekly basis versus its 50-week moving average and bands representing 2-standard deviations from its mean.


The index is pushing the upper-limits of previous resistance levels which has typically led to at least a short-term correction. However, as seen in early 2012, as the Federal Reserve was winding down QE2, the correction was quite a bit larger than we have witnessed as of late. If we assume a similar pull-back following the end of QE3, a test of support at the 50-week moving average would be most likely at 1900 or a 5% decline.

Furthermore, as I have discussed in the past, moving averages act much like gravity for stocks prices. The longer the duration of the moving average, the greater the “gravitationalpull” on prices. The chart below shows the percentage deviation of the S&P 500 from its underlying 50-week moving average.


At over 8%, the recent correction at the end of July did little to correct the extension of the markets currently. Also, we are in one of the longer periods in recent history where the markets have consistently remained at more than 5% above its 50-week moving average. As you can see, deviations that are more than 5% above the longer-term moving average are not infinitely sustainable, 10% extensions are even more dangerous.

Following the very mild correction in July, it would not be surprising to see the markets push higher into the fall. However, the risk of a more significant correction has not been alleviated by any means and investors should be cognizant of the inherent risks.

Importantly, the current “bullish trend” remains intact, and therefore portfolios should remain invested currently. The rising levels of bullishness and complacency in the markets are sure warning signs that something “wicked this way comes,” however, as I stated earlier this week, “timing is everything.” Despite the ongoing litany of articles that suggest that “buy and hold” is the only way to win the long term game, the reality is that participating in rising markets is only half the battle. What wins the long-term investing game is avoiding a bulk of the declines. 

Proving A Point

“I’ve had all I can stands, and I can’t stands no more.” – Popeye The Sailor

As I addressed above I have read an ongoing litany of articles about how active fund managers consistently underperform “buy and hold” index investing. However, the problem with all of these articles is that they are comparing mutual funds that have internal operating expenses with indexes. Furthermore, the vast majority of these “actively managed” mutual funds are simply closet index funds with no real sell discipline or strategy.

My premise has always been that it is entirely fine to underperform the index when prices are rising. However, it is critical not to capture the drawdowns during a market decline.

However, which theory is actually correct? I am going to put it to a live test. Now, mind you, the results of this test will not be known until after the next major correction. However, if I don’t start the test now, there will be no actual evidence to validate which theory is actually correct.

This coming week I am going to build a model portfolio that can be tracked real time with a very simple buy/sell strategy overlay. I am also going to test the theory that equal weighting a portfolio will outperform a market weighted portfolio over time as well.

In order to keep things fairly simple, reduce portfolio turnover and associated costs – I am going to use a basket of ETF’s to build a diversified portfolio. The portfolio will then be benched to the S&P 500 index, and relative performance will be tracked from there on a capital appreciation basis only.

I will post the model next week along with a discussion on the current arguments surrounding the passive/active investing debate. Going forward, I will track the results and report changes and performance along the way, along with continued discussions about the strategy, to validate which theory is actually correct.

Model Changes

Last week I stated:

“For this week, I suggest remaining “pat” and awaiting for market action to confirm the recent breakout. With the markets still on “sell signals” currently, there is a possibility that the current corrective action in the market is not over as of yet.

Investor “bullishness” and excessive complacency have quickly returned to the market which is now once again very overbought on a short term basis. Any dip in the market that does not violate short term supports, and reduces some of the short term overbought conditions, can be used to add selective exposure back to equities.”

The markets did indeed hold their ground this week and both initial “sell signals” are on the verge of turning positive. Therefore, the portfolio allocation model will revert back to full target allocations.


IMPORTANT: As I stated when the initial sell signal was given, by the time that occurs the markets are usually oversold on a short-term basis, and bounces should be used to sell into. This also holds true to “buy” signals. By the time “buy” signals are issued the markets are generally overbought on a short term basis. Therefore, add exposure to equity risk selectively and on short term corrections.

Do not misunderstand me, there is a fairly high degree of risk in the markets currently and just as the recent “sell signal” was quickly reversed, it can go in the opposite direction just as quickly. As Mr. Kotok recently stated: “For today, we are back in, but we are fully prepared to change rapidly if risk premia warrant such action.”

With this, I completely agree. Pay attention, things are likely to get interesting from here.

Have a great Labor Day Weekend **note: for very professional and informative section with 8 charts & 4 Tables go to Lance’s current Sector Analysis – Editor Money Talks 



Road To Retirement – Chasing ROI (Part 2)

Wordcloud1There must be a better way

While you were out chasing rates of return a group of us were better positioning our lives to take control of our money. There is arising a greater desire to put our lives into a financial position where we can use our own money and pay ourselves back. Capital is critical but most of us lack the ability to use it wisely.

It really is three-sided

Far too much focus has been on increasing our wealth in a one-sided manner – chasing rates of return. There truly are three parts to your financial self. Accumulation surely is one but transfers are another and lastly but most importantly there is our lifestyle. All three are intricately woven into our longer lasting reality. Chasing a rate of return on the accumulation side will not win the race you run if your lifestyle erodes everything else. The rate of return on accumulation can’t significantly improve your financial picture if you are transferring dollar after dollar in the manner you make purchases whether you use someone else’s money or whether you pay cash.

Perhaps there are areas in your own life that would benefit by recapturing lost opportunities or lost wealth transfers or lost costs. Of course, to do that would require we admitted some weakness in the manner in which we handle our money. Wouldn’t recapturing bad spending increase your accumulation corner a bit? Remember the old adage, how to make 18% on your money would be to pay off then cease using credit cards?

What Am I Missing?

What are your current savings dollars earning for you? Have you any missed opportunities?

If you lose a dollar you didn’t want to lose it is not just the dollar that you will miss. You will miss what that dollar could have earned for you along the way. This is an “opportunity cost” many of us do not consider and are therefore transferring away wealth during our income-producing lifetimes. Think of all those dollars sent in monthly to pay for that car you drive to and from work every day. What if you earned a penny on every payment you have ever made?

In your current planning have you considered what impact college funding will have on your retirement dollars or other children’s education or your lifestyle money? What impact will the opportunity costs on those dollars have ultimately on your retirement years? Or have you been hypnotized into “free money match” to provide for your retirement plan while ignoring funding your children’s education? College will still occur first and you will find a source to pay for it.   A better method would be to plan for it and let retirement planning adjoin it.

What money have you spent over the years on financing automobiles? Most families experience anywhere from $300k to $500k in lost opportunity costs on the dollars they finance to drive to and from work every day in those shiny new toys.

Percent-GraphicHow about credit cards? If you do not pay them off every 25-30 days how will they offset that rate of return you were bragging about at last week’s dinner party?

Did you buy term and invest the difference? How much in premium will you pay when the term is over and insurance is gone? We refer to that as an unnecessary wealth transfer with no result. Hope your debts are completely paid when the term ends and your family has no need to replace your income.

What value is there to you if you increased the deductible on your auto insurance? Could it put more money in your pocket? What would you do with the money?

What gain could be had if you increased the deductible on your homeowner’s coverage? Are there more dollars you have not explored that could increase your wealth? Unknowingly transferring your wealth and the lost opportunity costs associated with it erode all of those returns you’ve been chasing.

Did you believe the banker when they gave you a great deal on a 15 year mortgage instead of a 30 year mortgage? There is over $9 trillion in equity in today’s homes. That is money the bank is earning on instead of you. Ever ask yourself why you want that house paid off in 15 years? What if you had the money available in 15 years but you were in control of it and it was growing without taxation? Which scenario would you choose then? Pay off or have the money to pay off?

Capitalis critical. Over the course of your lifetime in chasing rates of return your exhaustion even if quite successful will not offset the losses experienced through opportunity and interest payments.

Having money in the bank is not the answer because the banker is earning money on your money.

Having money in equity in your home is not the answer because it is the mortgage company earning money on your money.

Sending money into government sponsored savings plans is not the answer because they can sweep in with an excise tax at any time to capture what you thought were your earnings.

Increasing your wealth is an optimum motivator but focusing only on the accumulation aspect while ignoring significant transfers of wealth will greatly affect your resulting lifestyle money whether in the near future or the distant future.

For those of you saving 10-20% of your annual earnings send me an email to tell me what portion of those funds you control. Let’s somewhat define control for this conversation.


  • Control means: if the banks close their doors; you are not concerned.
  • Control means: If stock falls, your earnings do not.
  • Control means: If the market crashed you still have access – it’s your money.
  • Control means: If taxes rise you are not impacted – not now or in the future.
  • Control means: You pay no fees on the increase – no monthly fees for advice.
  • Control means: The money is not at risk.


Do yourself a favor, sit down with all of your feel-good statements and assess your total cash position. If you are a consistent saver we know you do this often. One more time will not hurt, or will it? Ask yourself these questions this time:

  1. How much of it is protected?
  2. How much of it can’t be touched by lawsuit?
  3. How much of it is insured against your death?
  4. How much of it is safe if you become disabled?
  5. How much of it is insulated from higher taxation?
  6. How much of it can you put your hands on in a pinch?
  7. How much of it can be used tax-free?
  8. How much of it will be needed to fund your life after “retirement” into old age if you live that long?

Truly, if it’s less than thirty percent you are in for a rude awakening some day. If all of your money is piled up in your taxable distributions, get ready for a wave because it’s coming. It’s a wipeout with your name on it.

Any program sponsored by the government up front, and has the IRS tagged as “it” on the backside was not designed for your benefit at all. The government has a plan and it will implement it.

Do you?

You see, most of what even one generation ago could rely upon is no longer true. What you think to be true likely has changed while you slept. How long will you pretend to be asleep continuing the status quo? It’s your life. It’s your savings. The sad news is that most of us have the lion’s share of it stacked inside a program the government owns. And they will rejoice and be glad when you retire!

Conservative * Disciplined * Different– sometimes means the message is stranger than you are accustomed to, but the history of those implementing a different system speaks for itself…successfully.

Lynette Lalanne
Please share your story at lynette@streettalkinsurance.com

Have A Happy And Safe Labor Day Weekend.

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Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “The Lance Roberts Show,” Chief editor of the X-Factor Investment Newsletter and the Streettalklive daily blog. Follow Lance on FacebookTwitter and Linked-In