In April 2012, we predicted a drop in the S&P 500 to the level of 1300 by the end of May. Figure 1 shows the predicted behavior in April and May 2012, with the predicted segment shown by red line. We expected that the path observed in the previous rally would be repeated with the bottom points coinciding. When this prediction realized, we invested, say, one unit at the average price 1320. The expected exit level was 1500 in October 2013.
Figure 1. The original S&P 500 curve (black line) and that shifted forward to match the 2009 trough (blue line). Red line – expected fall in the S&P 500: from 1400 in March to 1300 in May.
Figure 2 shows the evolution of the S&P 500 monthly closing price between May and August 2012. The S&P 500 closing level for August was 1430 and reached 1469 in the middle of September. This level provided a ten percent return over approximately 4 months. One can see that the observed level was far above the expected level (blue line). The return and the deviation from the expected level both made us think that this was the best time to exit. We sold the index on September 21 (1460) anticipating strong turbulence (economic, financial, and political) and an overall fall to 1375 at a few months horizon.
Figure 2. Same as in Figure 1 with an extension between May and August.
Figure 3 shows the evolution of the S&P 500 monthly closing price in September-December 2012. The current level (October 26th) is 1411. We used it as a closing price for October and put the November’s level down to 1375. One can see that the red line intersects the blue curve. The previous history of the black and red lines intersection with the blue one makes us think that the time to enter the market (S&P 500 index) is approaching. We’ll definitely buy at 1350 to 1375 which is an expected level by the end of 2012. This level guarantees another 140 to 170 points (10% to 12%) by the end of 2013.
Figure 3. Same as in Figure 1 with an extension between September and November 2012.