By
StopAlerts
:
In January of 2012, Barron's polled many professional analysts
for their 2012 S&P 500 price projections. Some have changed
their views since then, but let's use their January forecasts as
background for this discussion of volatility implied 2012 year-end
price probability ranges.
Professional Forecasts (January 2012):
This is a summary of the professional 2012-12-31 forecasts as of
January 2012:
As of this date, Standard and Poor's is projecting $102 per
share earnings for 2012. That's pretty much where the professionals
were back in January, with the exceptions of Morgan Stanley (
MS
), Federated Investors (
FII
), and Deutsche Bank (
DB
), which were high; and the exception of Credit Suisse (
CS
), which was low.
The bulk of the forecasts were for the index to end 2012 between
about 1350 and 1400 (with a low of 1167 and a high of 1527). The
index today is at 1410.
Let's see what a pure volatility derived guesstimate says. It
looks to us like the math suggests a price probability range of
between about 1225 and 1575, not terribly different than the range
of professional forecasts 8 months ago.
Each chart below plots the price (black), the 200-day
exponential moving average (shown in tan), the 10% correction
level (dashed red), the 20% bear level (solid red), the price
probability range based on 6-month historical volatility
(green) and the price probability range based on 1-year
historical volatility (blue).
The logic is based on a normal frequency distribution of
prices. Reality is more irregular than that, but this is the
math that underpins options pricing, and is typically close
enough.
80% Probability Based On 1-Year and 6-Month
Volatility:
The statistical chance of the price being outside of the
probability cone is 10% on either side - 10% higher and 10% lower.
Based on 6 months of historical volatility, the 80% probable price
range is 1298 to 1534. Based on 1 year of volatility, the 80%
probable price range is 1263 to 1577.
(click to enlarge)
90% Probability Based On 1-Year and 6-Month
Volatility:
The statistical chance of the price being outside of the
probability cone is 5% on either side - 5% higher and 5% lower.
Based on 6 months of historical volatility, the 90% probable price
range is 1269 to1569. Based on 1 year of volatility, the 90%
probable price range is 1223 to 1628.
(click to enlarge)
Other Relevant Price Level Considerations:
If the price were to fall to the current 200 day average, it
would be 1338. If a 10% correction was reached by year-end the
price would be 1284. A bear achieved by year-end would produce a
price of 1141.
Of course, the price will do what the price will do, and
important events like a wider multi-country war over Syria, going
over the U.S. fiscal cliff, and collapse in Spain would throw
everything into a cocked hat.
In any event, the combination of professional forecasts,
mathematically-derived volatility-based projections, and chart
support level indications can serve as reasonable aids to forming
your own view.
Earnings forecasts and estimation of valuation multiples are
important too (see our blog for
historical and projected P/E multiples
from Standard and Poor's, Seeking Alpha for information about
historical trends
in S&P 500 sales, earnings, dividends, book value and payout
ratio.
Links to Seeking Alpha Data On Mentioned ETFs:
General Disclaimer:
This article provides opinions and information, but does not
contain recommendations or personal investment advice to any
specific person for any particular purpose. Do your own research or
obtain suitable personal advice. You are responsible for your own
investment decisions. This article is presented subject to our full
disclaimer found on the QVM site
available here
.
Disclosure:
QVM has positions in SPY as of the creation date of this article
(August 27, 2012). I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
this article.
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