From Where I Sit: Analyzing Valentine Capital
by John Gardner, Certified Financial Planner

Valentine Capital’s Investment Policy Committee meets regularly, including Thursdays, quarterly for 3 days, and at the end of every year for a week long pow-wow. During these meetings, the committee discusses our business philosophies, thematic moves, and market conditions. During our November 2008 Business Planning Conference, one of the many topics of discussion was the global economy and financial markets. Based on the outcome of those ongoing discussions, we arrived at a forecast of 1142 for the S&P500. This was a forecast broadly discussed in our IPC Notes and within client meetings. As recent as March 6, 2009, the S&P500 was 666, which (temporarily) proved us wrong! After a greater than expected 50% rally since the March 6, 666 level, the S&P500 is now 1025 (at the close of September 8, 09).

In re-assessing our committee’s notes and hypothesis for our equity market forecast, the observations made still support our outlook .Keeping a proper perspective, our view of a future S&P500 at 1142 would just get the index back to where it was in September 2008 (remember only 2 months prior to our November business planning). However our broader vantage point included an analysis of the S&P500 during 2 similar market trends: 1.) Late 2002 and 2.) Early 2004. Both timeframes preceded periods of economic improvement and were classic examples of the market “climbing the walk of worry”. Both of the above market conditions parallel to the current market back drop (especially from where we sat last November).

Among stock market analysts, there is a (often reliable) concept called “Retracement”, which is based on mathematician Leonardo Fibonacci’s theory stating that market fluctuations allow prices to “retrace” from its highs to develop a support level or forms a "bounce" off a low point to form a level of resistance (www.smartprofitsreport.com). This counter-trend concept move is expected (usually 50%) after a pronounced shift in the market one way or the other.

From our Business Planning last November, (S&P500 was at 777, which was ironic as we were in Las Vegas at the time) the S&P500 had fallen nearly 50% from the start of the 2008 year. Retracing 50% of that decline would bring the S&P500 back to about 1150.

Now we are looking further down the road and up at the market. While we are mindful of the “retracement” cutting both ways, it is to be expected that a pullback from current market levels will ensue. Maintaining a longer (and prudent) view, our 30 month S&P500 expectation is a return to early 2006 levels. A target objective of 1245-1325, with the additional application of technical and fundamental valuation tools. We know that the “normalized” annual stock market return is about 10% since the 1920s (source: Ibbotson). This long-term rate of return for the U.S. Equity Market alone could carry the current price to those higher forecasts.

The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of US equity performance. It is not possible to invest directly in an index.

Forecasts are subject to change at any time, based on market and other conditions and should not be construed as investment advice or a recommendation of any specific security.

Past performance does not guarantee future results.

John Gardner is president of Equity Research and Portfolio Evaluation, Inc. (ERPE). ERPE provides institutional investment research and analysis to Registered Investment Advisors, CPAs and individual investors. John Gardner is a consultant to Valentine Capital Asset Management, Inc. He is not an Investment Advisor Representative and is not affiliated with any broker/dealer. EPRE Inc. is not affiliated with Securities America, Inc.