Maybe. Or maybe not. Gregory Harmon from Dragonfly Capital shares his analysis with us.
Forget about multiple expansion or CAGR of earnings. These measures may be good to justify an end number for the S&P 500. And they may give you a ‘fair value’ for the equity markets. But the markets are not about fair values, but about capitalism and inefficiency.
For example, you do not walk into a car dealer and ask for the cost of all the parts and labor and then pay an 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. Then 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 really exist.
What does exist is price history and psychological reaction to it. Price history in the S&P 500 has a lot to tell you.
The chart —going back to 1980—can have many deep and complex interpretations. At its simplest, it can help give you a direction in which the markets are going.
There are two methods of price extension 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 1980s 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 method is to look at the consolidation pattern itself, a broadening wedge. As it breaks the top, the technician 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 guarantee, but both are methods that traders and investors will be following in the days to come.
