Unexpectedly Intriguing!
02 November 2009

S&P 500 Average Monthly Index Value, January 2008 to October 2009 We ask, because we're about to blow the doors off your mind. Last month, we offered two predictions for where the average of stock prices for the S&P 500 were going to go in October 2009, as we had come to what we proverbially called "the fork in the road." The chart to the right updates the chart we presented in that post to show where the S&P 500 did go, with respect to where our two prediction options would have placed them.

Not bad, eh? To be honest, we missed to the low side for Option B, with the average for the S&P 500 coming in at 1067.66, an error of roughly 2.0%. As a result, we'll be scoring two misses in our unforgiving plus-minus score for predictions, but as always, we'll leave it up to you to determine how meaningful our misses are.

But that's not the bit where we blow the doors off your mind. That's going to require a different chart.

Acclerations of S&P 50 Average Monthly Index Value and Trailing Year Dividends per Share (and Futures), January 2001 through September 2009 Specifically, this one (see left). Since the stock market bottomed in early March we've recognized that investors have largely focused on changes in the rate of growth for where dividends per share would be at the end of 2009. Those changes have been reflected in the dividend futures contract for the first quarter of 2010, which covers the period from 21 December 2009 through 19 March 2010.

We can visually verify that investor focus upon this period by considering the track taken by the change in the rate of growth of stock prices with respect to the level of that for dividends per share. What we see is that the acceleration for stock prices has traced a largely horizontal path, which has been largely consistent with the level of the acceleration for trailing year dividends per share corresponding to the dividend futures contract for 2010Q1.

Looking at that chart however, we also see something that demands a question be answered. There's a massive surge in the change in the rate of growth for trailing year dividends per share for the quarters following 2010Q1. When might that surge factor into where the average level of stock prices during the course of a month is set?

Accelerations of S&P 500 Average Monthly Index Value and Trailing Year Dividends per Share (and Futures), 2 November 2009 And this is where we get to blow the doors off your mind. The answer to that question is "right now." As you can see in the chart to the right, which we've updated with the average stock price data we now have through the month of October 2009, investors would appear to have shifted their focus forward in time toward the second half of 2010.

Here, we find that the average level of stock prices for the month of October 2009 falls between the amplified level of acceleration of where the dividend futures contracts for 2010Q3 and 2010Q4 would place them.

Now the question is which one of these quarters is providing the fundamental support behind stock prices today? Unfortunately, we don't know the answer to that question as yet.

S&P 500 Average Monthly Index Value, January 2008 through November 2009 (forecast) What we can do though is create another prediction based upon two possible outcomes, although this time, using the same base of reference (November 2008), but considering the results based on the dividend futures data for 2010Q3 and 2010Q4.

Incorporating the typical span of amplification factors that we have observed since January 2001, which ranges from 6.5 through 11.0, our math would anticipate stock prices for November 2009 to range between 936 and 1074, which encompasses the full overlapping range for both future quarters for dividends. For the sake of narrowing that range down, if we consider amplification factors between 9.0 and 11.0, that range becomes 1004 to 1074. This latter range is indicated in our forecast chart for November 2009.

It should be an interesting month. The larger values for the rate of dividend acceleration that would seem to apply provide for a wider forecast range (when multiplied by our typical amplification factors.) That provides a lot wider window into which stock prices might be expected to fall - on top of our overlapping forecast range.

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