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Every year the market tests a high-end and a low-end of its trading range. With this recent bull-market correction, the question on many investors’ minds is when will we see the market lows for 2010?

 According to Briefing.com, 2010 earnings estimates for the S&P500 are $84.30. However, since the beginning of the year, the dollar has appreciated as much as 16% against the Euro. A stronger dollar can hamper earnings and economic growth, especially for large multinational companies whose costs are incurred in more expensive dollars and whose revenues come from weaker euros. According to Credit Suisse analysts, every 10% decline in the euro results in a 0.4% decline in US GDP. Putting it all together, the stronger dollar may mean that earnings estimates for the S&P 500 are too high.

 So how do we estimate the low end of the S&P500 for 2010? First we need a price-to-earnings multiple. In low interest rate environments, the S&P500 tends to trade between 14-16 times earnings. We’ll be a bit more conservative and use 13.5 as our low-end price-to-earnings multiple. Next, we need an earnings estimate. We’ve already stated that we think $84.30 is probably too high given the 16% rise in the dollar over the euro. Using three different scenarios in which the 16% rise in the dollar reduces 2010 earnings by 16%, 10% and 5%, we come up with new earnings estimates of $70.81, $75.87 and $80.09, respectively. Multiplying our earnings estimates by our low-end price-to-earnings multiple estimate, we can get an idea for the low end of the S&P 500. Here’s the math: Scenario 1: $70.81 in earnings – 16% below estimates Low-end S&P500 estimate: $70.81 x 13.5 = 955.94 Scenario 2: $75.87 in earnings – 10% below estimates Low-end S&P500 estimate: $75.87 x 13.5 = 1024.25 Scenario 3: $80.09 in earnings – 5% below estimates Low-end S&P500 estimate: $80.09 x 13.5 = 1081.22

We have already tested as low as 1040.78 on the S&P500, but based on the analysis above, it may not be until we reach 1024.25 that we find the 2010 low for the S&P 500. If we can’t hold at 1024.25, then we would look to 955.94 as potentially being a very good buying opportunity for this market.

 If all this talk of low-end of the trading range seems too daunting, remind yourself that the market has to test a high-end of its trading range as well. Based off the earnings estimates above, and using 16 as our high-end price-to-earnings multiple, the S&P500 may trade as high as 1281.44 by year-end. This year-end target is similar to Credit Suisse estimates of 1270 on the S&P 500. This means that there may be as much as 17% upside in this market between this writing and year-end.

While the potential for strong upside to the high-end of the S&P500’s trading range exists, the summer months are historically slow for the stock market. Investors should not be surprised to see the market move sideways or even slightly downward between now and the end of summer. Thereafter, we are looking towards the market moving higher to 1270-1280 by the end of the year.

I hope you find my newsletters helpful in providing insight into the market and investment strategy. For those of you who like my newsletter, but want even more detail and analysis, I suggest you visit the White Paper Research section of my website, www.vaughnwoods.com. I am also currently accepting new clients. If you know anyone who may need a personal money manager, please let me know. You can also direct these individuals to the Newsletter Archive and White Paper Research on my website, as a way to make that first introduction to Vaughn Woods Financial Group.

Contact Us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0087

*Fee paid to Goldline Research for administrative costs
**Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com, Standard & Poors

*** Green, Dick, The Big Picture: Stocks are Incredibly Cheap, Except for the Risk. Briefing.com. 06/01/2010
****Garthwaite, A. et al. Credit Suisse Global Equity Strategy: Market comments. 05/21/2010