Saturday, February 26, 2011

S&P 500 Drops On Libyan Uprising (Charts) *Oil spikes up, US Dollar down*

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Libyan protester holds up defaced poster of Muammar Gaddafi
In 1972 Gaddafi gave himself the title "Brotherly Leader and Guide of the First of September Revolution of the Great Socialist's People's Libyan Arab Jamahiriya"

S&P 500 Overview

S&P 500 The S&P 500 dropped this past week to close at 1319.88 on Friday, February 25, 2011. The S&P 500, SPX, was -1.72% and -23.13 for the week, is +2.62% for February, was +2.26% in January, and is +4.95% for 2011. SPX is +95.10% and +643.35 since the March 9, 2009 market bottom which was 718 days ago. The SPX closing at 1343.01 on Friday, February 18, 2011 was a multi-year closing high, the highest close since the closing of 1350.93 on June 17, 2008. The current closing is -1.72% and -23.13 below. The current close continues above the the closings of 1300.68 on August 28, 2008 and 1305.31 on August 11, 2008, which was a rally peak. The current closing is now below the June 19, 2008 close of 1342.83. The S&P 500 has gained 20 of the last 26 weeks (beginning with the week ended Friday, September 3, 2010).

Volatility The VIX closed the week on Friday, February 18, 2011 at a much higher 19.22. VIX rallied and closed above the 20, 25, 50, and 100 day simple moving averages. VIX even pinned through intraday the 200d sma, which appears to be resistance. The descending 50d sma crossed below the descending 100d sma on August 23, 2010, a Death Cross, and below the mostly level 200d sma on October 8, 2010, another Death Cross. The descending 100d sma crossed below the mostly level 200d sma - a Death Cross - on November 11, 2010. VIX continues in a long term bear market, but the intermediate term indicator is now neutral/bullish. VIX put in a double bottom and multi-year lows of 15.45 on Wednesday, December 22, 2010 and 15.46 on January 14, 2011. Those were the lowest closings of 2010 and the lowest closings since July 19, 2007 (15.23).

The Big Question What happens now? Up, Down, Sideways?

Oil First and foremost this past week was the Libyan uprising and therefore concerns over oil supplies. Oil prices (U.S. light, sweet, crude) spiked up to an intraday high on February 24 of $103.41 and closed the week on February 25 at $97.88. The resulting higher gas prices will be a drag on USA economic growth if the crisis, and higher prices, persist. While local, national, and international media are already attempting to project high gasoline prices all the way into Summer 2011, this is conjecture and Saudi Arabia, et. al. will replace any lost production from Libya.

Economy Overall, the USA & Global economic data since fourth quarter 2010 has been very encouraging. We continue with our assessment and statement from prior weeks: The economic data appears to show the recovery is over and expansion has begun in both the Global and USA economies. Much of the economic data is now at Pre-Great Recession peaks and highs, not post-Great Recession peaks and highs. For example, the USA 2010 GDP (second estimate) was $14.66 trillion, which is 1) the highest ever and 2) higher than the 2008 peak of $14.37 trillion. The 2009 GDP dipped to $14.12 trillion as the Great Recession was in full force. In addition, there have been 6 consecutive quarters of growth in the USA GDP QoQ and Q4 2010 annualized is +2.8% and $14.86 trillion (second estimate). Of course, there is continued uncertainty over the sustainability of the "recovery" but no indication yet that there has been any slowing of economic growth, activity, and output QoQ (Q1 2011 compared to Q4 2010). The USA is not without economic and financial problems, of course, these are noted here [USA & Global Economy: Recovery Continued in January (GDP Charts) *Monthly Economic Review*]. Those problem areas noted plus the federal, state, and municipal budget deficits and cuts and now higher oil prices could stop the USA economic expansion and therefore halt the S&P 500 rally.

The Future We have pulled out the Magic 8 Ball to divine what lies ahead for the S&P 500. The bulls, aka greed and optimism, had been trumping the bears, aka fear and pessimism, in the equity markets for the past few months. The bears had the upper hand this past week. Exclusive of periodic EU sovereign debt crises, Arab uprisings, or any other international crisis short of all-out war, the seeming vagaries of the short-term market are mostly profit-taking and consolidation on pullbacks, not a change in the long term, or even intermediate term, upward trend. These international crises may continue to be a drag on USA equities periodically, but will not be the deciding factor in what stalls S&P 500 Post-Great Recession Rally. Slower USA and Global economic growth is what can stall the SPX and so far there has been no indication of this.

While a correction and pullback is inevitable, and a short-term pullback was experienced this past week, we predicted the SPX had an upside bias to 1300 - 1305, which was the peak of the August 2008 rally, then to at least 1322, then to 1343. The S&P 500 arrived at these levels and exceeded. The current pullback reached down and tested the 1300 - 1305 level at 1306. We then predicted the S&P 500 will ultimately reach 1400 if Q1 2011 economic growth data begins showing Q4 2010 has been exceeded. This appears possible, if not probable. The hurdles ahead, upon resumption of the rally, are 1350-1351, and 1360-1362, which are more June 2008 closings. Ultimately is June 5, 2008 benchmark closing of 1404. There is much resistance ahead and pullbacks, corrections, and consolidations are probable and currently in progress.

Q4 2010 corporate earnings, Q4 USA economic growth, and Q4 global economic growth have exceeded Q3 2010 and has propelled the S&P 500 above the 1300 benchmark. We continue to estimate the USA GDP for Q4 2010 at +3.4% QoQ minimum. The BEA second estimate was a very disappointing, in our view, +2.8%. However, we are mildly concerned that the Q1 2011 data may indicate that at least the USA economic recovery, if not the global economic recovery, has slowed, not stalled, from Q4 2010. This would halt the additional momentum necessary for the SPX to continue upwards through the 1300s to 1400 and onwards to the peak of the May 2008 rally (a very distant 1427 closing on May 19, 2008). A Q1 2011 GDP of less than 3% would probably halt the SPX short and intermediate term uptrend and possibly the long-term uptrend.

Economic and Market News Information about the USA and Global economies plus the USA financial system are posted at Boom Doom EconomyFinancial Controls, and Baidu Planet.

S&P 500 Drops on Libyan Uprising
+643 points in 718 days since the March 9, 2009 cyclical closing low of 676.53!

S&P 500 Daily Chart Below is the SPX daily chart from January 3, 2011 to the current close of 1319.88 on February 25, 2011. This chart illustrates the applicable price interactions for 2011. A monthly chart is included lower on this page for an even longer-term perspective.

Noteworthy Closing Prices
Current Close: 1319.88
2011 High: February 18 1343.01
2011 Low: January 10 1269.75
2010 High: December 29 1259.78
2010 Low: July 2 1022.58
YE December 31, 2010: 1257.64
YE December 31, 2009: 1115.10
Market Cyclical Low: March 9, 2009: 676.53

The weekly chart does not show the 25, 100, and 200 day simple moving averages and the uptrend line discussed in the commentary below *

Intermediate-Term Trend The intermediate-term signal, the comparison of the 25 day and 50 day simple moving averages, signaled a bull market for the SPX on Monday, September 27. That is, the 25d sma is greater than the 50d sma. The relationship between these two moving averages is a lagging indicator and continues bullish. Both sma's are ascending.

Resistance None of the moving averages are resistance, the SPX rallied above the 20d on February 25 and has not yet tested the 50d below. Current resistance is the 1320 - 1325 area and then above at 1328 - 1332. Above that is the multi-year closing high of 1343.01 set on February 18 and then the same day intraday high of 1344.07. Long term resistance was noted earlier in this post: 1350-1351, 1360-1362, and finally 1400-1404.

Support Support held this past week at 1306 and SPX is now above. First support is the 20 day moving average of 1316.82. The 1304-1307 area is next support. Below is key support is the benchmark and psychological price of 1300. Further below is support at the 50 day simple moving average of 1289.14. Next is strong support at 1276. There are multiple levels of support below the current price.

Moving Averages SPX is above all the simple moving averages monitored: 20d, 25d, 50d, 100d, and 200d sma's. All the sma's are ascending. Each is above any longer term average and are spread out in a bullish fan. The SPX broke down through the 20d sma this past week but rallied above on Friday, February 25, 2011. The 50d sma was not tested this past week.

Uptrend Line (Not shown on the daily chart above) The yellow uptrend line, a rate of price ascent, is from the March 9, 2009 closing low of 676.53 up through the 2010 YTD closing low of 1022.53 set on July 2. SPX began testing this uptrend line on August 24, rallied above on September 1, and has remained above since.

Downtrend Line The yellow downtrend line, a measure of the rate of price descent, is a long-term trendline from the October 9, 2007 all-time closing high of 1565.15 down through the February 18, 2011 multi-year closing high of 1343.01. SPX has been blow this downtrend line the last 5 trading days.

Relative Strength Index (RSI) The RSI 14 day = 54.56 is reasonable, ascending, and well below the recent high of 86.74 on February 18. Peaks in the last year have been in the high 80s and about 90.  The recent low of 35.43 (oversold) on November 26, 2010. The multi-year abysmal low was 10.40 on July 6, 2010. The 2010 peak was 99.30 on on March 17. The RSI 28 day = 56.58 is reasonable, ascending, and below the recent peak of 84.17 on January 10. The 2010 low was 34.09 on May 25. The 2010 peak was 84.25 on April 5. Both RSIs have returned to reasonable levels this past week after reaching overbought levels previously.

MACD (12,26,9) The MACD = -3.59 is ascending and has plunged to levels last seen in November 2010. MACD plunged to -11.44 on May 7, 2010, the lowest reading since the October 2008 financial panic. MACD peaked at +8.43 on June 18, 2010, the highest since the rally off the bottom in March 2009.

Long-Term Trend The 10 month exponential moving average of 1197.86 is a long-term trend indicator and shown on the monthly chart below. That is the line in the sand, so to speak, for the long term signal of a bear market. SPX is well above this signal. SPX initially dropped below this signal in late May, 2010 indicating a long-term bear market had arrived, but then regained and lost the indicator several times, signalling uncertainty and lack of trend during the summer trading range. SPX regained the 10m ema in September 2010 and has continued above since.

Conclusion The Libyan uprising and resulting oil supply uncertainty tested the SPX this past week. SPX broke down through the 20 day simple moving average but did not test the 50d sma further below. SPX regained the 20d sma on Friday, February 25. We maintain there is an upside bias for the S&P 500 to 1350 and 1400. The intermediate term trend continues bullish and the long term trend continues bullish. Ongoing overall positive USA and Global economic news plus recent Q4 2010 corporate earnings continue to sustain the long-term rally.

S&P 500 Monthly Chart

Below a very long-term view of the SPX on a monthly chart since March 1999. The chart includes all historical price interaction with the current SPX price. SPX has a long history of interactions with both 1300 and 1400 as resistance and support. The overall analysis and commentary are the same as for the weekly chart above. The uptrend line and downtrend line are the same, and as described, above in the daily chart discussion. The white moving average line is the 10 month exponential moving average, which is the long-term bull or bear market signal, as discussed the daily chart discussion. The current SPX price continues well above the 10m ema which signals a long-term bull market. The white 10m ema is tracking right on the yellow uptrend line, making it difficult to see.

Disclosure We have no position in SPX, SPY, or any other related ETF as of this posting. We will so note such positions at the time of a weekly posting, but not any short-term trades, such as intraday or intraweek trades, between the weekly postings.

About the S&P 500

The S&P 500® has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities, it is also an ideal proxy for the total market. S&P 500 is maintained by the S&P Index Committee, a team of Standard & Poor’s economists and index analysts, who meet on a regular basis. The goal of the Index Committee is to ensure that the S&P 500 remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large cap universe on an on-going basis. The Index Committee also monitors constituent liquidity to ensure efficient portfolio trading while keeping index turnover to a minimum.

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