Unexpectedly Intriguing!
08 June 2009

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, December 1991 through May 2009, with Index Value as of 5 June 2009 Indicated We suspect that a lot of the fans of our stock market forecasting posts were disappointed last week, since we basically took the week off from making any forecasts of where stock prices might be heading.

In our defense, there really wasn't much need for us to do any new forecasting since our previous forecast held up pretty well: we had forecast that the average of stock prices for the month of May 2009 would come in between 909 and 927 and the actual average of the month's daily closing values of the S&P 500 came pretty close to the low end of our forecast range at 902.41.

We'll leave it to our readers to decide how significant our missing our target by 6.6 points out of 902 might be.

Accelerations of S&P 500 Average Monthly Index Value and Trailing Year Dividends per Share with Futures as of 8 June 2009 But that begs the question: where might stock prices be heading next? It has been several weeks since this last forecast of ours and since that time, the S&P 500's dividend futures have slightly ticked upward. Consequently, we're raising our forecast range for where stock prices might be expected to be in the near term.

In that near term, our forecasting method would anticipate that stock prices will fall in a range between 935 and 955.

So why might we be considering sending our retirement portfolio out on vacation for a couple of weeks?

Federal Funds Rate and 10Y-3M Treasury Spread, May 2008-July 2008 The answer to that question is here. If the pattern we've observed holds, based on the year-ago activity of the Federal Funds Rate and the spread between the 10-Year and 3-Month Constant Maturity U.S. Treasuries, we could see stock prices take a nose dive as early as sometime next week. Given what we observe in the dividend futures however, we would expect such an event to be very short lived, and as the chart we've provided suggests, about two weeks in duration for all the smoke to clear.

To take advantage of that kind of opportunity, the way we'd want to maximize the value of our investment would be to sell it at some point during this week, while prices remain relatively high, then buy back in after prices have dropped, say on 30 June 2009, a year after a pretty strange event where the Federal Funds Rate and Treasury yield spread both acted very strangely.

In essence, we'd be betting that the percentage by which stock prices would drop would be greater than the transaction costs for first selling, then buying back into the S&P 500-type index fund in which our retirement portfolio is presently invested.

And we've got all week to decide just how lucky we feel....

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