Saturday, May 22, 2010

S&P 500 & Equity Market Review: Turmoil Rules!



The S&P 500, SPX, is down -4.23% for the week, down -8.23% for the month, down -2.46% for the year, and up +60.77% since the March 9, 2009 market bottom. In  addition, SPX is down -10.65% from the April 23,  2010 YTD closing high of 1217.28.  The Euro, via the Euro/US Dollar price, EURUSD, has stabilized somewhat which has resulted in the US Dollar, USDX, topping out.  This is bullish for the SPX.  Uncertainty, even Fear, has entered the markets via the EU Crisis and the EU, ECB, IMF Bailout plus suspicion about the fairness of the markets (Flash Crash May 6) - a disastrous combination.  Lately the Euro has been the tail wagging the dog, that is, the Euro goes down then the US Dollar Index goes up and the SPX goes down or vice versa.  As a result, technical and fundamental analysis are meaningless during such a crisis.

The Big Question What happens now? Up, Down, Sideways?
What a difference a few weeks make.  We have several major market issues and variables.  Overall, I foresee short-term sideways trading with a downside bias until some of this market turmoil settles down.  Only then will the bottom, support, be in.  I have included commentary on the major market issues below the SPX technical analysis.  Volatility is extreme, the VIX closed at 40.10 on Friday, May 21, up an astronomical +157.38% from the 2010 YTD closing low of 15.58 on April 12.

Major USA Equity Indexes The Russell 2000, NASDAQ Composite, NASDAQ 100, S&P 500, and Dow Jones Industrial Average 30 have all fallen well below the 2010 YTD lows, of course.  The bullish trends are broken.  For comparative purposes, the current price status plus intermediate-term and long-term trends and the date generated are:
S&P 500 Below 200d sma; Bear 5-20-10; Bear this week
Russell 2000 Below 100d sma; Bull 3-11-10, Bull July 2009
NASDAQ Composite Below 100d sma; Bear 5-21-10; Bull May 2009
NASDAQ 100 Below 100d sma; Bear 5-21-10; Bull April 2009
Dow Jones Industrial Average Below 200d sma; Bear 5-20-10; Bull July 2009

Currencies The two key currencies affecting the markets right now:
US Dollar Index Above 25d sma; Bull 12-21-09, Bull January 2010
Euro/US Dollar Below 200d sma; Bear 12-15-09; Bear December 2009

S&P 500: Turmoil Rules!

S&P 500 Daily Chart Below is the SPX daily chart for 2010.

Noteworthy Closing Prices on Daily Chart below:
Current Close 1087.69 (Lower yellow horizontal line)
2010 YTD High 4-23-10 1217.28
YE 12-31-09 1115.10
10 Month EMA 1091.64 (Higher yellow horizontal line)

Intermediate-Term Trend The intermediate-term signal, the comparison of the 25 day and 50 day simple moving averages, signaled a bear market for the SPX on Thursday, May 20.  That is, the 50d sma is greater than the 25d sma. An intermediate-term bull market had previously been in effect since March 16.

Resistance The current close, the lower yellow horizontal line, has pulled back dramatically.  There are multiple levels of resistance above.  The 1100 area, a benchmark and milestone  price is  just above. The 1150 area is also significant resistance. The 1200 area, a benchmark and milestone price, is significant resistance. SPX is at the consolidation trading range of late January and early February just below the peak occurring in October 2009. Until the markets calm down through less fear, suspicion, and therefore volatility, I don't think resistance is a factor right now.

Support There are multiple levels of support below, but as noted above regarding Resistance, until the markets calm down through less fear, suspicion, and therefore volatility, I don't think support is a factor right now.  The current close is at a price range support that was shown throughout November and into early 2009.

Moving Averages SPX has plunged through the 25d, 50d, 100d, and 200d simple moving averages. The 25d sma is now below the 50d sma.  The 200d sma was absolutely critical support.  A bounce above the 200d would be very encouraging this next week.  The 200d sma was last tested in early July 2009, a rally ensued.

Uptrend Line The uptrend line, a measure of the rate of price ascent, is from the March 9, 2009 closing low of 676.53 up through the February 8, 2010 closing low of 1056.74. The February 8 closing low had been the bottom of the 2010 pullback, before this current plunge. SPX has broken through this uptrend line.  I have left this uptrend line intact to observe when SPX can ultimately regain this rate of price ascent.

Downtrend Line The downtrend line, a measure of the rate of price descent, is from the October 9, 2007 all-time closing high of 1565.15 down through the April 23, 2010 YTD closing high of 1217.28. SPX is well below this downtrend line.

Relative Strength Index (RSI)
RSI 14 day = 29.45  is oversold, but still above the February 8 YTD low of 23.92
RSI 28 day = 37.33 is marginally oversold, just above the May 20 YTD low of 35.04
The RSIs are signalling oversold conditions but can go lower.

MACD (12,26,9) The MACD flipped to bearish on April 19 near the YTD high and plunged to -11.44 on May 7, the lowest reading since the October 2008 panic!  MACD is at and even below the dismal days of the March 2009 market bottom.

Long-Term Trend The higher horizontal yellow line is the 10 month exponential moving average from the monthly chart, which I have overlayed on this daily chart. That is the line in the sand, so to speak, for the long term signal of a bear market. The SPX, the lower yellow horizonal line, dropped below this signal this week, indicating a long-term bear market is being tested..

Conclusion Fear, suspicion and therefore volatility rule the markets presently, and the SPX has plunged accordingly.  Until the factors discussed below are reasonably resolved, especially the Euro Crisis, the markets remain in turmoil with a downside bias.  The intermediate term and long term trends are now bearish.  The technical indicators such as resistance, support, trendlines, RSIs, and MACD are pushed to extremes as a result of Fear.

Market News and Issues

A) Greece Sovereign Debt Crisis, now the Euro Crisis First Greece overspends, then the EU, ECB, and IMF bail the Greeks out, then fear of contagion to Portugal, Ireland, Spain, perhaps Italy and even UK increases.  Now the value and viability of the Euro itself is suspect, along the EU banking system and overall EU financial and economic system.  Until the world is convinced the EU can hold together and remain viable, market fear and volatility will continue and the USA equity markets are in limbo with little hope of regaining the 2010 YTD highs.  The more the IMF intervenes to bailout the EU, the more the USA has, since the USA contributes billions to the IMF.  USA taxpayers to the rescue!  EU has solved the liquidity crisis, but whether the solvency crisis can be solved is in doubt.  Hence, the viability of the EU is in question.

B) Financial Regulatory Reform Meanwhile, back in the USA, the political battle continues to reform the financial system, which creates uncertainty first within the financials sector.  Some more information on this is posted here.  After any financial reform is passed by Congress, this should eliminate the uncertainty as at least the rules of the road, and the related financial system impact, can be determined.

C) The Conference Board USA Leading Economic Index (LEI) TCB reported this week that the USA LEI decreased by -0.1% in April.  While this is an immaterial decline, it is nonetheless disappointing, and possibly disturbing, because any significant economic recovery should continue showing monthly positive gains for LEI.  For the 6 months ended April 30, the LEI has increased +4.4% to 109.3 (2004 = 100.0).  Since the equity markets are also considered leading indicators, this data is not bullish for USA equities.  The LEI monthly increases in 2010 have been +1.3% in March, +0.4% in February, and +0.6% in January.

D) Flash Crash! The fairness, objectivity, and validity of the entire USA equities markets, and other markets, is under suspicion.  Frankly, I think the entire USA financial system is being questioned, as noted below about Goldman Sachs.  The May 6, 2010 Flash Crash amplified and maginified the ongoing USA financial system debacle.  Are we being totally gamed, and controlled, by Wall Street?  Will the USA government take control and stop the Wall Street Banksters?  This Dylan Ratigan video sums it up.

E) Goldman Sachs & The USA Financial System  The SEC fraud charges against GS also bring into question the fairness, validity, and viablity of the USA financial system.  The Europeans are investigating GS and Merrill Lynch of Bank of America, Deutsche Bank,  There has even been a call for China to investigate Wall Street.  Until the Wall Street Banksters are brought to justice and financial system reform is implemented, the USA financial system is a fraud and corrupt - the USA taxpayers and citizens are being defrauded.  These investigations and charges will drag on indefinitely, probably for years. Markets could be impacted off and on as more Wall Street Banksters are hopefully removed from the financial and market systems.  More financial institutions will be hunted down and an examples made of them. The 3 credit rating agencies, S&P, Moody's, and Fitch also have gamed the system.  So there will be ongoing market reactions, just as with the EU, to contend with while trading.

F) Quarterly Earnings Season has all but been forgotten now that fear and suspicion rule.  Quarterly earnings have been very encouraging, especially in the technology, financial, and industrial sectors that I pay special attention to.

G) USA & World Economic Trends USA economic data has been overall positive and also for most of the World, especially Asia. USA jobs data is not great, but encouraging.  I reviewed the semi-annual IMF World Economic Outlook (April 2010) here.

Disclosure We are long AAPL, CRM, XLI, VMW.


No comments:

Post a Comment

Seeking Alpha