2013 US equities outlook ( S&P 500 )

Motivation behind restarting the blog with 2013 spx target
 

Even though i was following the financial markets in 2012 with keen interest, only a few friends  knew my thoughts, during 2012.  This year, i decided to use this blog to store some of my thoughts, to have a repository for some of my work.  I do not expect the frequency of entries this year  to equal 2011 blog entries, but the quality of analysis behind this year's articles would be higher, as i get to spend more time on research and analysis.

During October 2011, i got interested in longer term price targets, upon realizing the capitulation at bottom, and started  looking into  year end price target for s&p 500. I published this article only after a month, in November 2011, and i quote from that article... "my conclusion is that market will close the year at 1248 or better on the spx futures, as high probability (70%)...."  S&P 500 closed 2011 at 1258, 10 pts away from my target, and in the direction expected.

During 2012 January, 2nd week, I was able to share the results of my research on 2012 s&p  earnings and price target with with couple of friends, who valued my work and hence gave me back something in return. I updated this midyear, on July 4th, 2012.  Based on my analysis during june, i arrived at a fair value of 1421.5 as year end target for s&p 500.  In  December 2012 first week, I sent another email (due to increased fears about US fiscal cliff),  which forecasted a year end fair value at 1428 on spx,  with a potential to go higher to 1440 area. s&p 500 finished 2012 at 1426.

Past results are no assurance of future success; nonetheless, this motivated me to enhance my data analysis. So, in December 2012 i built a primitive model to use for forecasts. This modeling will be a life-long project for me, and this year's forecast is the first attempt with this.  (Too much adherence to forecasts, without proper risk management leads to disaster.)

A point to note is that this article was created during 2nd week of January, as a personal guideline for myself,   but i did not get a chance to write it down as a blog article until now.


Macro factors i considered for 2013:
   

•  market views european sovereign risks as tail factors, since ECB is standing ready for easing.
•  New chinese government has taken pro-market policies and eased on banks (RRR etc.). 
•  Japanese monitary policy is set in the direction of devaluing  yen. 
• QE infinity in US  will last atleast until end of 2013, if not more. 
•  Retail traders who have been risk averse after 2008 crash, are likely to join the bull market in the final stages of the bullish  trend.  Money flow into long-only funds on the  1st week of Jan was the highest since 2000, but it was also the fourth-largest weekly inflow on record.

So, with all this support for global markets from major economies, 2013 will be more bullish a year than 2012,  from the perspective of these macro considerations. 
     

S&P Earnings forecast:

• As of Jan.3rd 2013, Wall street  earnings expectations were for
  Jan season earnings (Q4,2012) = 25.42 (bottom-up estimate)       
  Apr season earnings (Q1,2013) = 26.47   
  For calendar year 2013        ~ 113 (bottom-up) & 108.73 (top-down)       
  Q4,2012 (yoy) growth rate     = 2.6%         
  CY 2013 growth rate        ~ 9.7%
  
• MY  FORECASTS
  Q4/2012 Earnings   25.63 or lower
  Q1/2013 Earnings   24.93 or lower
  2013 FY earnings = 103.6
  Earnings growth(yoy)  for Q4,2012 and/or  Q1/2013  has good probability  to be negative, which is my bearish baseline case for H1/2013.  My  bullish case scenario won't  come in near wall street  expectations which is above 2%

s&p 500  target:

• my comment on Jan 3rd,2013 in an email to my friends :
  "It is likely that market will test 1494 before march 1st. 
  A second possibility is for 1518 area.  Also, i see a correction
  looming (about 5% or higher)  before summer"
• based on earnings, a bullish CAPE gives,  spx  = 1531 for H1/2013. As usual, i will revise this number mid-year, for a earnings based target.
•  average based on various angles of technical analysis points me to 1582+  bullish target by end of year or early 2014 and 1680+  in 2014 (ie. still 12% + upside left in US equities over next 2 years)
• Seperately, i ran an analysis on correlation of  US equities to QE levels in the past and expected spx target, based on this model.   If we go by the cliche of  "Don't  fight the fed", past QE moves indicate that 2013 is likely  to see a 24% move up. So, QE infinity from 1266 bottom in june,2012  => 1569   (or more, as the retail crowd joins the party, this time around).
• Average of my current methods gives forecast  as
  1569 + 1531 + 1582 + 1481 (my base case earnings model estimate) / 4 = 1540 as initial  year end target for 2013, with a rough probability estimate of 80% associated with this number. 

 
Conclusion:

• Currently  spx  has reached my initial target  set at start of this year, and is working towards resistance area of 1531-1544,  which should  define first half of this year. Thus, i view the area above 1500 as  a chance to build protective positions on your long term portfolio (or) build short position into the upcoming correction (or for summer doldrums, on a quarterly basis). 
• Further buy points, when viewed  with a wide-angle lens, would be my  2012  fair market value  1428-1440 area and  1375 area (fair value  at start of  2012), with first target set at 2014 valuation near 1700 spx.
• I expect the second half of 2013 to be more bullish than 1st half, reaching the yearly highs. The mid-year update and forecast will create proper positioning into second half.