Volatility continues to be the order of the day. Yesterday the S&P500 was down 1%, briefly breaking its 50 day moving average (DMA); today it was up nearly 1%, in lighter trade.
Will the market continue to trade in a tight range near all-time highs? I have no idea, but history tells me at some point it will either breakup or breakdown. With the market at 17 times future earnings (PE) and a general deceleration of corporate profits, I’m assuming in the near term it’s more likely to breakdown.
With seasonal summer doldrums approaching and help from an over-hyped crisis (perhaps a Greece default/Euro-exit or Middle East violence) the long awaited market correction might occur. Which in my opinion could be an excellent buying opportunity.
The S&P500 is narrowly 4% above its 200dma (see chart- orange horizontal line). Given normal market volatility, a breakdown to the 200dma is easily within the realm of possibilities. The last time the S&P500 broke its 200dma (Oct 2014), it dipped 9.8% below its high and 4.4% below the 200dma. Assuming a slightly deeper drop (11.7% from recent highs), that would place the S&P500 at a more value oriented 15 PE (near 1880- the green horizontal line).
I would consider the S&P500 a much better value at 1880 than at the current 2123. We’ll have to wait and see if my patience is rewarded.
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