Three heroes, or where the market will move

In thought over the eternal question - where the market will move once again, caught itself on the "deja vu."

The lack of technical arguments to explain new market heights forces us to turn to the original sources, think about the eternal, about the physical laws of the surrounding world and the cyclicity of natural phenomena. The evolution of relations increases the frequency and metabolic rate. The development of technology pushes to a faster achievement of the result with the subsequent exit from the cycle. Relations have long ceased to be laid for the “centuries”, and high -speed “five -year planes” come to replace the usual “decades”.

The projection of such philosophical thoughts is reflected in the realities of the stock market.

Below the schedule of a wide index of the American S&P500. How not to recall the picture of Vasnetsov “Three heroes”, to whom I want to add Pushkin’s “In scales, like a fever ...”

With enviable constancy and interval of 5 years: 1998–2002, 2003–2008, 2009–20 ... 14? Market quotes draw a picture in which three fellows stand up, like the twin brothers are similar. It is interesting to note that since 1998, all of us, still active participants in the market of those times, passed the reference point of 800 points 3 times, and for the 5th time approached the treasured level of 1400 points. From it to the top, it’s a stone's throw - the last 10%. Those who have reached this line have a serious “miner” ( mountainous disease. This is when the brain is turned off from the absence of oxygen at a height ). How the Great Bard sang: "... in the world there are no such peaks that you can’t take ..."

At this line, the market, in the best heroic traditions, should make a decision, despite the prophecy, not to demolish their heads, stubbornly move forward. And where is he? Otherwise, after all, the fairy tale does not affect, and the matter is not done.

Experienced mountain market climbers know that you need to prepare for a descent no less seriously than for raising. As in the mountains, accidents during descent happen much more often. This time the signaling missile to the descent will again be given markets. Understand where it can shoot where it is to protect the descent.

It is clear that the last six months the market movement was determined by the cash flow of cheap capital and the ratio of market participants to risks. At the same time, the growing vector laid positive macroeconomic statistics from the States and good reporting of the corporate sector. While the passions around Greek duty were temporarily subsided, and the position of Italy and Portugal is not exacerbated, the further direction of market quotations will be even more determined by the quality of corporate balances.

The next month we enter the reporting lane on the first quarter of 2012. Despite the fact that by the end of last year, analysts reduced forecasts for the expected profitability of companies, the risk that real numbers will not coincide with the expectations of analysts are great. Fear of reducing the profits of companies is primarily due to high energy prices, a strong dollar and a decrease in activity in the nascent markets. These three factors, coupled with a restrained level of price inflation, traditionally affect the reduction of the operating margin. Production companies are not able to “shift” the increased costs of consumers by increasing prices, and after a wave of reduction of expenses, including due to under-investment in working capital and staff reduction, there is nothing to save on. Therefore, despite the growth of sales, the operating margin of companies of all sectors should inevitably decrease, which means that the increase in profitability will also be reduced.

The degree of readiness of the market for the perception of the inevitable deterioration of the quality of corporate growth as a natural process will determine the depth of subsidence of the quotes. The task is aggravated by the fact that companies are in no hurry with forecasts or do not express it in accurate numbers. So, during a meeting with analysts, Pepsi limited the rate of decrease in the growth of a “high unit number”, which in simple language means a decrease by 7–9%. In general, analysts expect the combined profit of companies included in the S&P500 index at the level of $ 225.8 billion, which is only $ 1 billion below the previous record IV quarter of 2011. Since then, however, the capitalization of companies has grown by 11%. If we assume that the increase in profit will remain at the level of the first quarter until the end of the year, then for the entire 2012 profit of S&P500 will be about $ 900 billion. For current multipliers of r/e, market capitalization exceeds the estimated total profit by 14.5 times, which is 12.5 times higher than the average historical. As a rule, the market capitalization of developed markets coincides with the volume of GDP, which in the USA is $ 1.5 trillion, which is only 7-10% higher than the current market estimate. From this it follows that the potential of market growth, remotely, is limited to 10%.

This assumption is reflected in the positioning of futures options. On the date of closing of options on March 15, most participants took long positions, and the short were moved in time. However, long positions were formed due to the sale of Put options, which indicates a readiness to buy stocks significantly below current levels, and short due to the purchase of 10 percent options of the stake, which indicates uncertainty in the continuation of the growth of slightly higher levels.

In this regard, we can expect a decline in volatility before the start of the reporting period and insignificant movements of market quotes with subsequent correction of indexes.