by Greg Harmon
Or maybe not. Forget about multiple expansion or CAGR of earnings. These measures may be good for spinning a tale to justify an end number. And the may give you a ‘fair value’ for the equity markets. But the markets are about capitalism and inefficiency, not fair values. For example, you do not walk into a car dealer and ask for the cost of all the parts and labor and then give them and extra 10% to get to ‘fair value’ for your new car. You do some research as to what others have paid and work on a discount from the sticker. The dealer shows you the inflated sticker and lets you negotiate off a small amount to make you feel better. The he tries to add back undercoating or other nonsense, and increase his profit by offering you financing in house. Nobody knows what the car is exactly worth until you sign on the dotted line for $30,000 with a 5 year 1.9% loan. And then the next guy walks in and the negotiation starts over. Fair value is a nice term that does not exist.
But what does exist is price history and psychological reaction to it. The price history in the S&P 500 has a lot to tell you. The chart above going back to 1980 can have many deep and complex interpretations. But it is the simplest that can help give you a direction. There are two methods of price extension shown that take prior price history into account. The first is the Measured Move. This is as simple as looking at the move from the base in the early 1980′s to the middle of the consolidation zone from 1197 to 2013 and projecting that it happens again higher. This method targets the S&P 500 at 2300. The second is to look at the consolidation pattern itself, a broadening wedge. As it breaks the top the technician then will project the price difference from the widest point as a move again higher. This method targets 2416 for the S&P 500. Nether method is a guaranty but both are methods that traders and investors will be following.
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