Prediction: Dec 31, 2015 S&P 500 close at 2346 up 13.9%

Updated: Mar 10th, 2017 | Vance Harwood

My 2015 year end prediction is based on the trend channel shown below, which has been in place since around May 2012.


There’s nothing magical about this channel. The market will transition from it at some point, and I think it’s important to plan for that, but for the moment the channel is the trend.

This sort of trend channel has characterized the last three bull markets.

SPX channels 1995

The blue line in the chart is the 250 day simple moving average.

I suspect these patterns originate from random market moves—which often look like trend channels— interacting with human / computerized pattern matchers that transform random patterns into a self-fulfilling prophecies.  When the market starts approaching the top of the channel followers start selling, and they buy when the low channel is breached—reinforcing the pattern.

Anyone using that approach would have done very well the last two years.

As bull markets move into the territory of bubbles and nose-bleed valuations the risk of the trend ending increases, but predicting the end is notoriously difficult.  You can be years early in calling the top.  In Jack Schwinger’s excellent book “Hedge Fund Market Wizards”, he comments, “Predicting the top of a bubble is like trying to predict the weather a year out.”  In the book hedge fund manager Colm O’Shea agrees, but adds, “But you can notice when things have changed.”

Colm relates how in 2006 and 2007, “I was thinking the markets were in a completely unsustainable bubble.”, but rather than try to pick the top his firm stayed long.  “We were quite happy to be part of the bubble.”  However they did limit their risk by doing trades with limited downside (e.g., buying options rather than the securities themselves), and they waited for things to change.  When they did notice a big change (LIBOR rates spiking in August 2007) they moved to bearish positions.

In the chart above, the last two bull markets signaled they were really over when the index was below the channel and below the 250 day moving average for more than a couple days.  I will certainly be watching those metrics during 2015.

I will also be matching the health of the overall US economy because fundamentally the market relates to the economy.  The next recession and the next bear market will be linked together.  Some of the factors I will be watching:

Interest rates

  • The Fed has signaled that it may start raising interest rates in 2015. While the market might falter when this happens, I think the biggest issue will be the inflation rate behavior compared to the Fed’s 2% target.  Some feel that the Fed’s actions in expanding the money supply created a powder keg that will explode once inflation starts rising.   Others worry that increasing rates will undermine the recovery, risking sliding back into deflation and recession.   I favor the latter because the Monetarists who think only the money supply matters regarding inflation have been completely wrong the last 5 years.

Oil prices

  • The dramatic drop in oil prices has something for everyone. Commuters and airlines loving it, drilling equipment manufacturers hating it, oil tanker business loving it, holders of junk grade debt from energy companies hating it, and so on.   Overall I think these impacts will mostly cancel out and since the energy segment of the economy was overheated I think some scaling back will be healthy.

Wage Growth

  • The majority of USA workers have seen their wages barely increase over the last decade while corporate profits have increased dramatically. Unless power shifts back to labor, unlikely I think, we won’t see general wages increases much over the rate of inflation.

Stock Buybacks

  • In the last four quarters S&P 500 companies spent $567 billion buying back their own shares—a year to year increase of 27%. While it pains me that companies apparently don’t think that they can find a better place to invest this money, I understand that preventing share dilution from stock options / restricted stock issuance makes sense (although most of these shares go to already highly compensated employees).  What I abhor is companies (like IBM) going into debt to finance stock buybacks in an attempt to hide a deteriorating business.  This behavior has bubble possibilities because the next recession will knock out these companies and those that hold this toxic debt.


  • The European austerity policies, rather than solving problems have extended its recession and exacerbated unemployment. The Eurozone poses no danger of overheating the global economy.   As the US economy grows the dollar will continue to climb—providing a natural braking mechanism as imports get cheaper and exports relatively more expensive to trading partners.

In the year or two before the tech crash of 2000 and the financial crisis of 2008 the market felt overheated to me.  Before those crashes there was an outrageously overvalued tech sector, and a vastly overheated home building / mortgage industry respectively.  So far I don’t see the next bubble forming.   Yes, trillion dollar student loan debt is worrisome, but I don’t see it crashing the economy.  Yes, oil prices dropping 50%+ will put the pinch on oil business, but again I don’t see the domino effect that goes with the collapse of a bubble.  To destroy the momentum of a growing economy requires a collapse on multiple fronts—no single facet has enough impact.

So, for the short term—at least for a week or two—the trend channel is safe.

SPXH—Hedging the S&P 500 For Free?

Updated: Mar 10th, 2017 | Vance Harwood

The holy grail of investing is achieving high growth with low risk.   Practical strategies mix different types of investments in the hope/expectation that losses in some areas will be offset by gains in others.  Unfortunately this has gotten tougher over the years because many asset classes (e.g., commodities, bonds, stock market sectors) now tend to move in lockstep when the market is panicking—making it difficult to get effective diversification.

Some investments like puts on a stock or index position reliably move in the offsetting direction but are expensive, extracting ongoing costs that reduce your overall return—sometimes for years.  Your return can be pretty bad if a correction or bear market doesn’t come along.

VelocityShares’ new TRSK and SPXH ETF’s offer some interesting new tradeoffs between growth and risk.   Both funds use the S&P 500 index as the growth driver with 85% of the assets. The remaining 15% is invested in volatility positions with the intent of minimizing the primary risk to the equity position—big bear markets.

The chart below is my simulation of how a $1K investment in these products at the all-time high in 2007 would have fared during the 2008/2009 bear market compared with SPY, the biggest S&P 500 index ETF.


While not undamaged, the simulation shows that TRSK / SPXH would have fared significantly better than SPY.


Max Drawdown % Recovery Time to Prev. High

SPY (div reinvested)

 55%  54 Months  (Mar-2012)


 35%  15 Months (Jan-2010)


 40%  17 Months (Mar-2010)


During a bear market TRSK will hold its value better, but in sustained bull markets, where the market spends most of its time, SPXH should be a better performer.


While TRSK gained 80% over this 3 year period, SPXH gained 110%—almost identical to SPY’s performance.  SPXH’s level of portfolio protection was free!

SPXH and TRSK are the first volatility exchange traded products to be structured as Fund of Funds (FoF).  Instead of investing in the S&P 500 directly these VelocityShares funds hold equal portions of the three largest S&P 500 Index ETFs: SPDR’s SPY, iShares’ IVV, and Vanguard’s VOO.   Because the annual fees of these giant funds are minuscule (.09%, .09%, and .05% respectively) the traditional complaint about mutual fund style Fund of Funds—paying high fees for both the fund and the funds it holds does not apply.

On the volatility side, the default ETFs will be ProShares’ UVXY 2X long and SVXY -1X inverse funds.  These have annual fees of .95%, but from reading the VelocityShares TRSK/SPXH prospectus it appears that the FoF managers intend to implement the volatility positions with swaps whenever practical, which should lower the fees that must be paid to other companies.   The VelocityShares funds themselves will charge an annualized fee of 0.75%.

SPXH and TRSK will be the second and third volatility funds to distribute a dividend from the equity portion of the asset allocation (PHDG was the first).  The S&P 500 composite yield has been running around 1.75% per year, so I expect these funds to yield around 1.5%.   Be aware that the indexes that these funds attempt to track assume dividends are reinvested, so if you want to track the indexes with your investments you should turn-on automatic reinvestment of dividends.

By providing two funds with different hedging characteristics VelocityShares acknowledges that one size does not fit all.   TRSK provides better downside protection but lowers the return during sustained bull markets.  SPXH and SPY had compound annual growth rates of about 20% during the 2009 to 2013 bull market.  TRSK’s annual return during that same period was around 16%, so the additional protection (unneeded in this case) reduced the growth rate by around 4% per year.

I don’t know what it is about volatility investing, but it seems to have a special talent in producing products with dizzying complexity.  In the case of TRSK and SPX we have two funds based on indexes that are based on funds that are based on other indexes that are based on futures that are occasionally synchronized with another index (CBOE VIX).  To help navigate this maze I’ve created a hierarchy and listed some associated resources:

Level 1

Ticker Description Reference Index Website Historical data Resources
TRSK VelocityShares Tail Risk Hedged Large Cap ETF VelocityShares Tail Risk Hedged Large Cap Index VelocityShares ETFsProspectus Not Available White Paper
SPXH VelocityShares Volatility Hedged Large Cap ETF VelocityShares Volatility Hedged Large Cap Index VelocityShares ETFsProspectus Not available White Paper

Level 2

Ticker Description Reference Funds/Indexes Website Historical data Resources
TRSKID VelocityShares Tail Risk Hedged Large Cap Index SPY / IVV / VOO / UVXY/SVXY  (ref SPVXTRSP) VelocityShares Indices Not Available Index
White Papers
SPXHID VelocityShares Volatility Hedged Large Cap Index SPY / IVV / VOO / UVXY/SVXY(ref SPVXVSP) VelocityShares Indices Not Available Index
White Papers

Level 3

Ticker Description Reference Indexes Website Historical data Resources
SPVXTRSP S&P 500 VIX Futures Tail Risk ER Short S&P 500 VIX Short-term Futures Index (SPVXSP) VelocityShares Indices Google Finance Index MethodologyWhite Paper
SPVXVSP S&P 500 VIX Futures Variable Long/Short ER Short Term S&P 500 VIX Short-term Futures Index (SPVXSP) VelocityShares Indices Google Finance Index MethodologyWhite Paper

Level 4

Ticker Description Reference Securities Website Historical data Resources
SPVXSP S&P 500 VIX Short-term Futures Index VIX Futures S&P Indices TR version (column B) Index Methodology

A Tale of Two Bulls

Updated: May 17th, 2013 | Vance Harwood


The prices of SPY (S&P 500) starting in March of 2003 and of 2009 have tracked each other surprisingly well over a 6 year period.   The current market has managed higher highs each year, but then that advantage has evaporated by the Christmas holidays.

This year the market has already achieved the higher highs part of the pattern—and for the first time since this recovery begain the VIX levels between the two bull markets have become comparable.   If 2013 follows the 2007 pattern we will see a significant up-tick in volatility later this year—with the VIX reaching at least the low 30s.   In 2007 the market went into its sideways pattern around May 18th.


Prediction: Dec 31,2013 S&P 500 close at 1468.38 up 2.96%

Updated: Jan 9th, 2015 | Vance Harwood

For my 2015 year end prediction for the S&P 500 see this page.

Update:  In the post below I wonder how long the close correlation between the S&P 500 and its prices six years previous will continue.   December 31, 2014 provided the answer:  5 years—the correlation failed in 2014 with an ending difference of 25.9%.  No half measures here.   This sort of pattern matching between historical periods and the present is a favorite pastime of many financial writers, but the bottom line is that most of the time it’s not predictive.   For more see “Patterns, Predictions, and the Correlation Fairy.”

Originally posted on 23-Feb- 2013, updated with the December 31st, 2014 closing values. 

My forecasting technique has correctly predicted the S&P 500’s year-end close with an average accuracy of 1.6% for the 2007 through 2012.  

Year End Estimated  Actual % Difference
31-Dec-08 879.82 903.25  +2.66%
31-Dec-09 1111.92 1115.1  +0.286%
30-Dec-10 1211.92 1257.88  +3.79%
30-Dec-11 1248.29 1257.60  +0.75%
31-Dec-12 1418.30 1426.19  +0.56%
31-Dec-13 1468.38 1848.36  +25.88% (way off!) 

This forecast doesn’t require much computation—it’s the year-end closing value of the S&P 500 six years prior.   The chart below shows SPY (effectively 1/10 of the S&P 500) from 2003 to 2007 with SPY from 2009 to the present superposed on the same day of the month.


At the bottom I’ve shown the VIX index for these two different time spans.

I don’t believe charts from the past are reliable in predicting the future, but since seeing this pattern in November, 2009 I’ve been surprised at its close correlation (0.94!)   This year’s divergence was less than 2011’s, with 2012’s SPY going as much as 11% above the 2006 levels and only 3% below.

Correlation does not necessarily imply causation.   Nobody believes that today’s  market is consulting the 2007 stock records to determine its movements, but on the other hand this pattern does not feel like a random happenstance.  I think the similarity comes from both periods being  recovery phases after major crashes.   The big question is how long will this tracking persist.

If this pattern holds the S&P 500 will end 2013 with a paltry 3% gain—likely with a lot of volatility between now and then.   Some of the factors that will be influencing the market this year:


  • In 2007 we were getting into the frothy part of the housing boom/bubble.  Qualified buyers were getting scare and prices were sky high.  In 2013 housing seems poised for normalcy, with the foreclosure backlog reduced to manageable levels and new starts climbing.   New housing is a great creator of jobs and associated demand for materials, appliances, furniture, etc.
  • Short term Treasury bills in January 2007 were yielding 4.93%—65 times the January 2013 rate of  0.075%.   Even with that level of economic support from the Fed, this economy is struggling to create jobs.  The economy will need to improve quite a bit before the Feb starts applying the monetary brakes—and interest rates start their inevitable climb.
  • Given 2007’s high interest rates I expected its inflation rate would have been high, but actually inflation was easing in 2007, averaging 2.85%—not much higher than 2012’s 2.07% rate.
  • In general unemployment remains high, and wage increases have been very small.   It’s possible that structural shifts in the economy have permanently reduced the need for medium to low skill jobs—which would be bad news for demand.
  • Europe has been relatively quiet.  Clearly the European Union has decided to pay what ever it takes to keep Greece in the union, and this has reduced the overall fear factor.   A destabilizing factor is the very high unemployment rates in the weaker countries.

Market valuation and money flows

  • The Shiller inflation adjusted PE ratio for the S&P 500  is currently 21.6, which compares to 27.20 in January 2007—20% lower.    However, historically this PE ratio has averaged 18.5, so you can argue we’re already near the top.
  • There’s a lot of money parked in bonds and cash.  If it flows into equities we’ll see a run-up—but it feels like these investors are arriving very late in the recovery.   Has the “buy high, sell low” crowd just arrived at the party?

Psychological Barriers 

  • The 1550 level on the S&P 500 index presents a daunting 13 year old resistance level.  No one wants to be the poor sucker that buys at the top.

S&P 500 Resistance

S&P 500 Resistance


One thing is clear, regardless of how 2013 goes, we don’t want a repeat of 2008 in 2014.

SPY 2003 -- 2008

SPY 2003 — 2008


Prediction: Dec 31,2012 S&P 500 close at 1418, up 12.78%

Updated: Jan 17th, 2013 | Vance Harwood

Originally posted 10-Jan-2012

One forecaster has correctly predicted the S&P 500 year-end close within an average of 2% for the last 4 years:

Year End Estimated  Actual % Difference
31-Dec-08 879.82 903.25  +2.66%
31-Dec-09 1111.92 1115.1  +0.286%
30-Dec-10 1211.92 1257.88  +3.79%
30-Dec-11 1248.29 1257.60  +0.75%
31-Dec-12 1418.30    ??


This forecast is not from a  human, or a computer program—it’s the year-end closing value of the S&P from 6 years prior.   The chart below shows SPY (effectively 1/10 of the S&P) from 2003 to 2006 with SPY from 2009 to the present superposed on the same day of the month.

At the bottom I’ve shown the VIX index for these two different time spans.

I don’t believe patterns from the past are reliable in predicting the future.   It’s not surprising that markets recovering from crashes will show a similar trajectory, but since first seeing this pattern in November, 2009 I’ve been surprised at the close correlation.   This year showed the biggest divergence, with 2011 SPY going as much as 19% above the 2005 SPY and 10% below before moving back into synchronization.

One thing is clear—volatility since the 2008/2009 crash continues to be elevated.   I predict that the market in 2012 will not be for the faint of heart.