S&P 2300 By May???

Well, it is that time of the year again when analysts all across the country begin to roll out their predictions for the coming year. This is a pretty fruitless exercise considering that the most accurate forecasters are meteorologists, and their predictions are only good for a 3-day view into the future. However, it keeps the media busy reporting them, and you focused on all of those delicious returns you will reap in the coming year. That is if everything goes according to plan.

The latest prognostication topper was from Sam Eisenstadt who was the former research director at Valueline, Inc. His prediction is that the S&P 500 will hit 2,300 by May of 2015. That is an 11% gain over the next six months.

Now, before you scoff at the forecast, his econometric model has a fairly decent historical track record. For example, as Mark Hulbert quoted:

“To appreciate how good his model is, consider what its forecast was six months ago — when the S&P 500 stood at 1,924. At the time, investors were expecting a big summer correction, but Eisenstadt's model was forecasting that the index would surpass 2,100 by the beginning of December.

As fate would have it, the market has made it ‘only' to 2,074. But I don't think any of Eisenstadt's followers are complaining. On the contrary, in the messy world of stock market predictions, Eisenstadt's has to be graded remarkably accurate.”

Here is what is important. This move to 2300 would very likely correspond with the 2015 “market melt-up” I discussed very early this year.  To wit:

“There is another piece of historical statistical data that supports the idea of a market ‘melt up' before the next big correction in 2016 which is the decennial cycle.

The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying ahead of 2015.  As shown in the chart above, there is a very high probability (83%) that the 5th year of the decade will be positive with an average historical return of 21.47%.

The return of the positive years is also quite amazing with 10 out of the 15 positive 5th years (66%) rising 20% or more.  However, 2015 will also likely mark the peak of the cyclical bull market as economic tailwinds fade, and the reality of an excessively stretched valuation and price metrics become a major issue.

As you will notice, returns in the 6th and 7th years (2016-17) become substantially worse with a potential of negative return years rising.  The chart below shows the win/loss ratio of each year of the decennial cycle.”