As disciplined investors having been active in the financial markets for more than two decades, we recognize the overwhelming necessity for institutional investors to be allocating capital underpinned by rule-based strategies for effectively managing risk, and this blog post touches a little more on that.
Fundamentally speaking, on the date of writing this blog post, the S&P 500 with its most recent rally has become very overvalued based on a multitude of valuation metrics since reaching a bottom in early April. It is important to understand that valuation is a poor timing mechanism in the short term as market prices are buoyed more by the popularity of issues and pervasive sentiment governing markets.
And with the VIX around 16.6 and the PUT/CALL Ratio around 0.60, market uncertainty and market sentiment are still far from terminal extreme values.
Back on April 7th 2025 we wrote a blog post about the markets in crisis and the ensuing panic on Wall Street and beyond due to a multitude of factors and highlighted why disciplined investors should celebrate market calamity and lower stock prices as an opportune time to initiate and build investment positions in the best quality undervalued businesses.
Looking at today, when we apply our proprietary technical analysis to the S&P 500 on a medium/long-term basis, the market price appears to be in an uptrend that is mildly strengthening yet has not triggered a terminal extreme. We have identified a probability over time for the S&P 500 to grind its way to 7500 and continue its path of becoming extremely overvalued along the way.
On the flip side, medium-term institutional pools of support appear around 6468 and 6166. Now if market calamity strikes, we see a probability the market price could retest strong institutional pools of support around 4800 (tested in April 2025) and 3500.
As long-term investors in a very overvalued market we retain a market-neutral stance in the S&P 500 combined with prudent risk and portfolio management. However, this stance could change in a timely way for a multitude of reasons as the risks to the downside become asymmetrically greater than the reward to the upside.
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