The fair value of the S&P 500 and its meaning

How to calculate the fair value of the S&P 500

 

 

Here I am with my monthly update.

The first question is now: “What has happened to the stock indices after the raise of interest rate by the FED?”

An index is similar to a stock as regards its fair value.

You can calculate it in many ways.

I prefer this method for an index (it is a simplified formula):

FV S&P 500 = S&P 500 dividend yield / (quarterly data risk premium + 1 month T-note interest rate – % GNP).

It becomes:

FV = 42.32 / (4.18 + 0.16 – 2.2) * 100 = 1977.57

This value is not too far from the close value of the index of 1995.33 on the 17th of September 2015.

Nothing happens by chance in the stock market. It is only a question of mathematics.

In general, I can say that investor analysts agree now with fact that the fair value of the S&P 500 is in a narrow range between 2000 and 1977 points about. I think that this happens with whatever formula they can use. It is distance of about 1.16% between these two values.

This mean that the raise of interest rates by the FED was already discounted by the stock market.

Therefore, what is about to happen to the S&P 500 and to the NASDAQ stock indices?

If the growth rate of US economy improves, the S&P 500 will increase its value every month.

Let us look at the forecasts.

 

S&P 500 stock index forecast updated on 18th of December 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Nasdaq stock index forecast updated on 18th of December 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Italian stock index forecast updated on 18th of December 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

They tell us a story. They are telling that both the NASDAQ and the S&P 500 will face a quarterly bottom between the end of December 2015 and the end of January 2016. Then they should go up again if things improves and nothing bad happens.

Economy is something that varies every day. Every day, the fair value of financial instruments can change.

A trader should always adapt to whatever change of conditions, this makes trading both difficult and interesting.

I am willing to buy new very good stocks in that period. In fact, the most of stocks that are quoted are returning to their fair value in these days. This is the message of the S&P 500.

I have sold all my stocks recently for this reason. I have suggested to my customers to do the same.

The second question is: “What will be the stocks worth considering in the next bottom?”

I give you an answer with an extract of a book “Superperformance stocks” by Richard S. Love, that you can find in page 82 – Chapter 7:

 

“A winning combination in potential superperfomance stock is rapidly rising earnings, a small supply of stock, low P/E ratios, and a product that promises strong future growth.”

 

Here again, we face the problem of fair value and growth. I remember that being a trend follower trader means to me to be a follower of increasing fair value companies. It does not mean simply following a price that goes up and catching all the spikes that a stock can have.

There must be a fundamental reason because a company increases its fair value. I want to see that reason.

Because of this, I can’t anticipate what are the best stocks to buy know. I have to wait for the next bottom and stocks will tell me which of them will show a shared interest as an investment and why.

They will be maybe the oil stocks if the oil price will go up or the bank stocks. Who knows? Stocks will tell us what are the most interesting worth buying.

 

Even if I use a different method in selecting stocks respect the previous one, some fundamental concepts must be understood.

 

Last but not least, I tell you that I have developed an interesting approach in defining the fair value of company with Bollinger Bands recently. I keep on doing mathematical research to look for something interesting as regards the stock picking argument.

This instrument will help me to select company better and better in the incoming bottom.

Remember that a new 5-year cycle has just started and this increase of the stock indices looks to be only the beginning. New occasions will take place.

This is all for the moment.

I wish you a Merry Christmas and remember to share this post with your friends.

Kind regards,

Fredrick

 

 

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  • Fredrick

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