Using Range to Forecast the S&P, 04/02/08

The maximum annual range of the S&P 500 has been about 400 points (2002, 2003).

Taking the range and working backwards into three scenarios (the top is in, the bottom is in, and we're in the middle) can be used to forecast the annual high and low:

If the top is in:
Current SP high of 1472 - 400 point maximum annual range implies a low of 1072
If the bottom is in:
Current SP low of 1257 + 400 point maximum annual range implies a high of 1657
If we're in the middle:
Current SP 1372 +- 400 point annual max range implies a low of 1172 and a high of 1572
Now, rank the scenarios using independent probabilities (the probabilities don't need to add to 1):
Odds that the top is in given financial crisis, recession and inflation: 70%

Odds that the bottom is in given the above: 40%

Odds that we're in the middle, given the above: 40%
And use the probabilities to build a forecast:
Top: (.7(1472) + .4(1657) + .4(1572))/1.5 == 1548

Bottom: (.7(1072) + .4(1257) + .4(1172)/1.5 == 1148

Where 1.5 is the sum of the probabilities, the weights, used when ranking the scenarios.
Projected Range for the S&P in 2008:
1148 to 1548

Henry Carstens
Vertical Solutions