Will the U.S. Stock Market give birth to its own Black Swan?

At 2099.06 points the S&P 500 is now in a confirmed uptrend and on the cusp of attacking the 19 April high of 2100.80. If it conquers this pressure point, the index will enter a zone of resistance up to 2126.64 points. This range will certainly be treated by the market with due trepidation, when it returns from the Memorial Day holiday on Tuesday!

1According to my stochastics indicator, the market appears to be over-bought and my Grail momentum indicator is swinging a bit to the down-side. A far more interesting factor is shown in the table, because its value coincides with the area of the resistance zone. The S&P 500’s average earnings growth has been steadily declining since 2010 and has lost -15.42% from its peak in that year. It appears to confirm the growth stagnation of the U.S. economy, and could signal an impending correction or even the start of a recessionary trend if other factors feed into the decline. The projected P/E ratio calculated by Standard & Poors is 18.73, which, if correct, would cause the S&P 500 to drop to 1620.71 points, a loss in the index of 22.82% with a 24.6% probability!

S&P 500 average  earnings growth rate   S&P 500’s current P/E Ratio   S&P 500’s Expected Value
$87.53 x 24.26 = 2123.48

This scenario of course all remains to be seen, but it suggests that a black swan baby in the making, because the estimate also confirms the U.S.’s GDP 1st quarter figure, which has been revised upwards recently from 0.5% to 0.8%, but is still altogether very meagre and fragile. An annual GDP growth of 2% plus now seems rather remote for 2016.

What tends to exacerbate matters is the uncertainty of the “we will – we won’t” vacillation of the Federal Reserve, which is tending to oscillate into a more middle stance, as evidenced after its latest meeting announcement of ‘a rate hike in the coming months!’, which injected a bit of life into this docile market last Thursday.

It all looks like everything fits together, but I’m reminded of what Benjamin Disraeli, the British Prime Minister in the 19th century, is said to have proclaimed, ”There are lies, bloody lies, and then there are statistics.” So the fit I suggest may just simply be a potential outlier. Be that as it may, it is nevertheless prudent to be prepared for any outcome.

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John Henry Smith
John Henry Smith of Grail Securities specializes in the U.S. stock market and offers a unique and powerful advisory service to private investors, institutional investors, and SME asset managers, who are seeking to consistently beat the market. All our strengths are at your disposal to provide stock market research and recommendations with the only aim of growing wealth. To achieve this we develop with you a customized investment strategy in terms of your risk and return preferences.
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