Unexpectedly Intriguing!
May 12, 2009

When we last looked in on the stock market, we noted that stock prices were building from a new base and that we were anticipating that the average of the S&P 500 would fall somewhere between 935 and 955 for the month of May 2009. We also said we were getting out of the business of doing near real-time updates, and would re-address our forecast only when it shifted enough to justify doing so.

Accelerations of S&P 500 Average Monthly Index Value and Trailing Year Dividends per Share, with Futures Data as of 12 May 2009 Which brings us to today. The trend we observed in that post of the ongoing erosion of the expected future rate of growth of dividends per share has continued and, as a result, we've modified our target range for the S&P 500 for May 2009.

The dividend futures data at present suggests that we should set a target range for the S&P 500 from 930 to 950, however with the slow erosion of the future expected value of the index' dividends per share, we thought it might be prudent to shift our forecast somewhat lower to try to stay ahead of the trend. Consequently, we're setting our target range for the S&P 500 in May 2009 to run between 925 and 945 to account for the slow rate of erosion we observe.

In the absence of a sharper decline in the expected future growth rate of S&P 500 dividends per share, we would view any significant drop in stock prices below this level as a buying opportunity. We believe the data indicates that stock prices will continue to generally rise throughout the month without a significant correction in the near term.

Speaking of those expected future dividend values, here are the values we are using in our calculations as of this morning:

S&P 500 Dividend Futures Data, 12 May 2009
Year-Quarter Quarterly Dividends per Share Trailing Year Dividends per Share
2009-Q2 5.49 25.65
2009-Q3 5.33 23.93
2009-Q4 5.55 22.33
2010-Q1 5.62 21.99
2010-Q2 5.38 21.88
2010-Q3 5.69 22.23
2010-Q4 5.71 22.39

We've emphasized the data for 2009-Q4 in the table above, since it would appear that this is the period upon which investors are currently focused in setting stock prices (the 8-month shift indicated in our chart above.)

We use the trailing year dividend futures data in our calculations. Going by that measure, it would appear that investors presently don't expect a real turnaround in the economy until the third quarter of 2010, as this would mark when trailing year dividends per share would resume positive growth. This would be the most likely period in which order might re-emerge in the stock market.

Update 13 May 2009, 1:45 PM PDT: Modified font to boldface in fourth paragraph. Some dividends are being cut today, while others are being diluted. We'll see how the futures change.

Update 13 May 2009, 10:44 PM PDT: They changed, but not by enough to alter our forecast. Be sure to review that newly boldfaced type....

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