Sunday, March 13, 2011

S&P 500 Down -1.28% for Week on Global Uncertainty (Chart) *Rallies above 50 day average on Friday*

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A catastrophic earthquake hit Japan on Friday, March 11, 2011

S&P 500 Overview

S&P 500 The S&P 500 was down this past week on a higher Wall of Worry to close at 1304.28 on Friday, March 11, 2011. The S&P 500, SPX, was -1.28% for the week, is -1.73% for March, and is +3.71 for 2011. SPX is +92.79% since the March 9, 2009 market bottom which was 732 days ago. The 2nd anniversary was last week. 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 -2.88% below. The current close is between 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 21 of the last 28 weeks (beginning with the week ended Friday, September 3, 2010).

Volatility The VIX closed the week on Friday, March 11, 2011 up at 20.08. VIX continues above the 20, 25, 50, and 100 day simple moving averages and below the 200d sma, which is key resistance. The 25d sma did regain the 50d sma on February 22, 2011, which is a bullish sign. 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, Spain, and Catastrophic Earthquake First concern this past week were high oil prices because of the Libyan revolution and other Arab uprisings. U.S. crude and Brent crude closed the week on March 11 at $101.16 and $113.44, respectively. The resulting higher gas prices will be a drag on USA and Global economic growth if the crisis, and therefore higher prices, persist. Saudi Arabia, Kuwait, Nigeria, et. al. are and/or will replace most, if not all, the lost production from Libya. So far it's been Big Oil and the oil producing countries that have benefited from the Middle East turmoil while consumers worldwide pay the price, yet supply has not materially decreased. Second concern was the downgrade of Spain's soveregin debt rating by Moody's as the EU sovereign debt crisis continues. Third concern was on Friday as a catastrophic earthquake hit Japan, the world's third largest economy. The economic impact on Japan and possible global implications has yet to be fully determined and realized.

USA and Global Economy Overall, the USA & Global economic data since fourth quarter 2010 continues to be very encouraging. The negative impact of sustained higher oil prices will not be in monthly economic data for a few more weeks, other than the expected plunge in consumer sentiment already being reported. 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. 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: Expansion Continued in February (GDP Charts) *Monthly Economic Review*]. The financial problems noted 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 bears, aka fear and pessimism, have the short term momentum and are currently trumping the bulls, aka greed and optimism, in the equity markets. 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 clear indication of this.

S&P 500 Macro View While a correction and pullback was known to be inevitable, and a short-term pullback continues, the SPX is at 1300 - 1305, which was the peak of the August 2008 rally. As these current crises fade, SPX could continue upwards to 1322, then to 1343. The S&P 500 arrived at these levels and exceeded earlier in 2011. The current pullback has reached down, even closing below 1300 once, and continues testing the 1300 - 1305 level. The S&P 500 can ultimately reach 1400 if Q1 2011 economic growth data begins showing Q4 2010 has been exceeded. This continues to appear possible, if not probable. The higher hurdles ahead, upon resumption of the rally, are 1350 - 1351, and 1360 - 1362, which are more June 2008 closings. Ultimately is the far away June 5, 2008 benchmark closing of 1404. There is much resistance ahead and pullbacks, corrections, and consolidations are probable and currently in progress.

USA GDP 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. JPMorgan lowered their USA Q1 2011 GDP estimate from +3.5% to +2.5%, which seems extreme. A lower USA Q1 2011 GDP would halt the additional momentum 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 Daily Chart

S&P 500 Daily Chart Below is the SPX daily chart from January 3, 2011 to the current close of 1304.28 on March 11, 2011. This chart illustrates the applicable price interactions for 2011.

Noteworthy Closing Prices
Current Close: 1304.28
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

S&P 500 Chart Review
Intermediate Term Trend: 25d sma > 50d sma, tenuously bullish
Long Term Trend: 10 month ema = 1218.30, bullish
Resistance: 20 day average 1320, then 1325, then 1327 - 1332
Support: Current close, then 50 day average 1302, then 1300, 1295, 1276
Moving Averages: below 20d, 25d sma's, above 50d, 100d, 200d sma's
Uptrend Line: above, from 3-9-09 closing low of 676.53 up thru the 7-2-10 closing low of 1022.58
Downtrend line: below, from 10-9-07 all-time closing high of 1565.15 down thru the 2-18-11 closing high of 1343.01
RSI 14 day = 38.74 is oversold, lowest since 11-30-10
RSI 28 day = 53.60 is reasonable, lowest since 11-30-10
MACD (12,26,9) = -3.71, descending

Conclusion The Libyan revolution, other Arab uprisings, and resulting oil supply uncertainty has tested the SPX the past 3 weeks although overall USA and Global economic data has been very good. Consumer confidence has dropped on rising oil prices, as expected. There has been technical support and resistance but the 50 day simple moving average is the current battleground and the SPX continues below the higher 20 day sma. If high oil prices persist, the 100 day simple moving average could be come the next test. We maintain there is an upside bias for the S&P 500 to 1350 and 1400. The intermediate term trend continues tenuously bullish and the long term trend continues bullish. Ongoing overall positive USA and Global economic news plus Q4 2010 corporate earnings continue to sustain the long-term rally but the wild card is presently the duration of high oil prices.

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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