Where are the Markets (S&P 500) Heading?

Trailing Twelve Months P/E on S&P 500

• 2013 S&P 500 EPS so far till 02/18/2014: $107.56 (1)
• Index closing at 1840.76 on 02/18/2014 implies trailing P/E=17.18 (TTM).
• Using a population of last 50 years trailing twelve months (TTM) P/E ratio data of the S&P 500 index gives: Mean=18.70, Median=17.76 & Standard Deviation=10.15
• Implies current market valuation close to median of the population but less than mean and market fairly priced based on last TTM earnings. 

Forward Twelve Months P/E on S&P 500

• Forward 12 month S&P 500 earnings estimates: $120.77 (2) on 02/18/2014 and came down from $124.73 around a year back (03/28/2013). 
• Based on the index price of 1840.76 on 02/18/2014 indicates forward P/E=15.24. 
• Markets costly or not cheap on a forward earnings basis since 10 year average forward P/E=13.9 (3). Note that convergence of Forward and Actual Earnings happens over a period of time.

(1) & (2) Standard & Poors: http://us.spindices.com/indices/equity/sp-500

(3) FACTSET: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_2.21.14.pdf 

Chart Analysis

Here is the chart of the S&P 500 and there is some indecisiveness at this level of around 1840. Unless the index break through its previous high of 1851, its not going to be pretty. As you see below in the chart there is a gradual formation of a double top (not fully formed yet) and high probability or potential for a big correction looms ahead. Although we are down ~1% on S&P 500 YTD, chances of a market sell-off remains high. A correction at this stage for the next few weeks could take us down to the 1738 level back again on S&P 500 which we tested during the first week of Feb 2014. Additional correction (or sell-off), if we cannot hold the levels around 1738 could lead us down to around 1650 level on the S&P 500 which is my downside target for this year. Will revisit the levels on a week by week basis.