Sunday, June 6, 2010

S&P 500: Bear Market Has Some Teeth



The S&P 500, SPX, is down -2.25% for the week, down -2.25% for the month, down -4.50% for the year, and up +57.40% since the March 9, 2009 market bottom. In  addition, SPX is down -12.52% from the April 23, 2010 YTD closing high of 1217.28.  The Euro, via the Euro/US Dollar price, EURUSD, broke down through 1.20 at the Friday, June 4 close and is discussed here.  This has resulted in the US Dollar Index, USDX, reaching a 2010 YTD high of 88.29 at the Friday, June 4 close.  This is bearish for the SPX.  Fear trumped Uncertainty at the Friday, June 4 close for the Euro and SPX.   The disappointing USA May jobs report, on top of the EU Crisis and suspicion about the fairness of the markets (Flash Crash May 6) created 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 all of this vice versa.  As a result, technical and fundamental analysis are mostly 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.  By market turmoil, I mean the EU Crisis primarily and now uncertainty about the strength, even the viability of the USA economic recovery secondarily.  Only then will the bottom, and therefore support, be in.  I have included commentary on the major market issues below the SPX technical analysis.  Volatility has been high, the VIX topped out at a YTD closing high of 45.79 on May 20.  VIX is now at 35.48, still high but off the extremes.

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, intermediate-term and long-term trends, date generated, and the percentage off the 2010 YTD high are:
S&P 500 Below 200d sma; Bear 5-20-10; Bear May 2010, -12.52%
Russell 2000 Below 100d sma; Bear 5-26-10, Bull July 2009, -14.55%
NASDAQ Composite Below 200d sma; Bear 5-21-10; Bull May 2009, -12.29%
NASDAQ 100 Below 100d sma; Bear 5-21-10; Bull April 2009, -10.86%
Dow Jones Industrial Average Below 200d sma; Bear 5-20-10; Bear May 2010, -11.36%

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 (More commentary here)

S&P 500: Bear Market Has Some Teeth

S&P 500 Daily Chart Below is the SPX daily chart for 2010.  A monthly chart is included at the bottom of this page for a broader perspective.

Noteworthy Closing Prices on Daily Chart below:
Current Close 1064.88 (Lower yellow horizontal line)
2010 YTD High 4-23-10 1217.28
YE 12-31-09 1115.10
10 Month EMA 1087.03 (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 since the April 23 YTD closing high.  There are multiple levels of resistance above.  The 200 day simple moving average has proven to resistance and SPX has stayed below for eleven consecutive trading days.  The 1100 area, a benchmark and milestone price is above. The 1150 area is also significant resistance. The 1200 area, a benchmark and milestone price, is significant, and now far away, resistance. SPX is at a price range that occurred a various times in September, October, and early November 2009.  Until the markets calm down through less fear, suspicion, and therefore volatility, I don't think resistance is a material 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 material factor right now.  However, the SPX is at the February 2010 market lows (1056.74 on February 8) and the  consolidation before a rally ensued.  The 1056.74 is a key benchmark and psychological price.

Moving Averages SPX has plunged through the 25d, 50d, 100d, and 200d simple moving averages. The 25d sma is now plunging sharply, below the 50d and 100d sma's, and is now approaching the 100d sma.  The 200d sma was absolutely critical support and has been broken through.  At least regaining the 200d would be 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  of 1056.74 had been the bottom of the 2010 pullback, before this current plunge. SPX broke through this uptrend line on May 13 and has been below for 16 consecutive trading days.  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 has remained well below this downtrend line.

Relative Strength Index (RSI)
RSI 14 day = 35.30 is oversold, but still above the February 8 YTD low of 23.92
RSI 28 day = 35.95 is oversold, just above the May 25 YTD low of 34.09
The RSIs are signalling oversold conditions but can go lower.

MACD (12,26,9) The MACD is bearish effective June 4, after one day of being bullish on June 3.  Previously MACD had been bearish since April 19 near the SPX price YTD high and plunged to -11.44 on May 7, the lowest reading since the October 2008 panic!  MACD is hovering around the 0.00 (neutral) line.

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 in late May, indicating long-term bear market has arrived.

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.

Economic and Market News

A) Greece Sovereign Debt Crisis, now the EU & 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.  This week Spain was downgraded by Fitch from AAA to AA and on May 28 the French Budget Minister said France could not ultimately maintain their AAA credit  rating.  First Greece was downgraded and crisis ensued, then Spain was downgraded - next Portugal and Ireland, then later Italy.  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 does, since the USA contributes billions to the IMF.  USA taxpayers to the rescue!  The EU appears to have solved the liquidity crisis, but whether the solvency crisis can be ultimately be resolved is in doubt.  Hence, the viability of the EU is in question.  Nouriel Roubini summed up the Euro Crisis here.  More about the Euro here.

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  and then within the markets.  Some more information on this is posted here.  After any financial reform is passed by Congress, this should eliminate the uncertainty for at least the rules of the road, and then the related financial system impact can be determined.

C) Leading Economic Indicators (LEI) The Economic Cycle Research Institute reported their Weekly Leading Index fell to a 39-week low and the annualized rate to a 47-week low.  Previously, The Conference Board reported that their USA Leading Economic Index 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).  The LEI monthly increases in 2010 have been +1.3% in March, +0.4% in February, and +0.6% in January.  Since the equity markets are also considered leading indicators, this data is not bullish for USA equities.

D) USA Unemployment (Jobs!) The BLS May Employment Situation report was disappointing and undoubtedly contributed to pulling down the markets on Friday, June 4.  Even though the unemployment rate decreased to 9.7% from 9.9% and total jobs increased +431,000, the private sector generated only +41,000 jobs while the public sector increased by +390,000.  In April, the private sector created +218,000 jobs.  Obviously, we all can't work for the government and it's the private sector job growth that will create a viable USA economic recovery.  The May U-6 unemployment rate (Table A-15, seasonally adjusted) was 16.6%, down from 17.1% in April.  In addition, the Gallup Poll reported underemployment in May at 19.1%, compared to 18.9% in April, which was also disappointing.

E) USA GDP The BEA "Second Estimate" for Q1 2010 was +3.0% and Q4 2009 was +5.6%.  Economist Peter Morici has some comments about GDP and the BLS May jobs report here, "Halting Recovery Keeps Unemployment High".  Morici states that the USA needs about +3.0% GDP growth to "pull down unemployment" and that recently actual GDP growth has been +2.0%.

F) USA Sovereign Debt Of note the week of May 31 was the funded federal debt exceeding $13 trillion!  Even more incredible is the USA GDP is approximately $14.5 trillion.  So funded federal debt is rapidly approaching the total of the entire American economy.  The debt totals can be seen at  There will be a Day of Reckoning as Congress cannot stop spending, be they Republicans or Democrats.  Federal spending has taken on a life of its own as Congress sends  home the pork and spends on programs that are politically advantageous.  When the Day of Reckoning  will be, I do not know: 1 year? 5 years? 10 years?  The Peter G. Peterson Foundation has the best information on this national disgrace here.  David M. Walker, the former Comptroller General of the United States, is the CEO of the Foundation and has been warning about this impending disaster for years.

G) Goldman Sachs & The USA Financial System  The SEC fraud charges against GS also bring into question the fairness, validity, and viability 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.

H) 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.

I) USA & World Economic Trends USA economic data has been overall positive and also for most of the World, especially Asia. Europe is now the weak link in the global recovery.  The semi-annual IMF World Economic Outlook (April 2010) is reviewed here.

J) 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.

S&P 500 Monthly Chart

Below is the monthly SPX chart since January 2006.  The overall analysis and commentary are the same as for the daily chart above.  The yellow horizontal lines are the same, and as described, on the daily chart above.  The yellow uptrend and downtrend lines are also the same, and as described, on the daily chart above.

Disclosure We have no position in SPX or any related ETF.


No comments:

Post a Comment

Seeking Alpha