I’ve updated the chart we showed last month (“The Rally No One Saw Coming“) with the trading range for the S&P 500 for 2014. Some of the most widely-watched someones – strategists at major banks and asset managers who release price targets each year – are included here with black bars denoting forecasts for this year and last.
Option implied volatility interpolated for a hypothetical year-end expiration is looking for a one standard deviation move up or down of 15%. That’s actually a slightly narrower range than the same estimate at the beginning of 2013 (+/- 17%) and for those of the two years before that (24%, 21%). This all stands to reason, since what makes for broader range estimates is just greater implied volatility, and for equities implied volatility is greater when investors are thinking more about downside risks. It also follows that we can expect to see year-end ranges continue to narrow as long as the market ramps.
Another thing to note is how much tighter and how much more bullish the consensus was on the street for this year. First, neutral is the new bearish: the minimum estimate in this survey had the S&P 500 at 1850, which would still be a gain for the year. Compare the bar for 2013, where the median target was also positive (light green dot) but there were still some actual bears. Additionally, notice how little of the option-implied range is covered by strategist targets. Some might call that evidence of groupthink, or maybe it’s just evidence that hedgers continue to pay too much for put protection. I’m inclined toward the latter view, because while there are credible things to be said for a neutral-to-modestly bullish forecast, it’s hard to conjure a source for substantial downside risk.