Saturday, April 16, 2011

S&P 500 Dips First Week of Earnings Season (Chart) *VIX lowest since July 2007*

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The first week of earnings season was lackluster, but a wave of earnings reports is coming next week

S&P 500 Overview

S&P 500 The S&P 500 closed the week at 1319.68 on Friday, April 15, 2011. The S&P 500, SPX, was down -0.64% for the week, is down -0.46% for April, was down -0.10% for March, and is up +4.93% for 2011. SPX is up +95.07% since the March 9, 2009 market bottom which was 767 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 -1.74% below. The current close is above the closings of 1300.68 on August 28, 2008 and 1305.31 on August 11, 2008, which was a rally peak, just before the USA financial crisis and market crash.

Volatility The VIX closed the week on Friday, April 15, 2011 sharply down at 15.32. This is the lowest close since July 19, 2007 (15.23)! VIX continues below the 20, 25, 50, 100, and 200 day simple moving averages. The slightly descending 50d sma regained the slightly descending 100d sma on March 22, 2011 but remains below descending 200d sma since October 8, 2010, a Death Cross. The slightly descending 100d sma crossed below the descending 200d sma - a Death Cross - on November 11, 2010. Both the intermediate term and long term indicators are now bearish.

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

Oil, Libya, Earthquake, Debt First concern for several weeks has been high oil prices because of the Libyan revolution and other Arab uprisings. U.S. crude and Brent crude closed down for the week on April 15 at $109.66 and $123.73, respectively. Persistent higher gas prices is now becoming a drag on USA and Global economic growth. Second concern has been the civil war in Libya plus other uprisings in the Middle East, which then affects the oil prices. Third concern is the catastrophic earthquake that hit Japan, the world's third largest economy. The resulting nuclear radiation crisis and the negative economic impact of this ongoing crisis and possible global implications are beginning to show in economic output both for Japan and on the worldwide economy. Fourth concern is now the USA debt of $14+ trillion plus the heated political and social debate.

USA and Global Economy Overall, the USA & Global economic data since fourth quarter 2010 continues to be very encouraging. The extent of the negative impact of sustained higher oil prices and global turmoil is being shown in March data. The expected plunge in consumer sentiment is already being reported, although a positive bounce was reported so far in April. 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 in February was at Pre-Great Recession peaks and highs or post-Great Recession peaks and highs. However, March economic data (in general) has shown a slowing of the expansion, both for the USA and Global economies.

The Future We have pulled out the Magic 8 Ball, which of late has been murky lately, to divine what lies ahead for the S&P 500. The bulls, aka greed and optimism, had rallied the prior 2 weeks and negated much of the losses inflicted by the bears, aka fear and pessimism. This past week was basically flat for the S&P 500. The ongoing Middle East uprisings, impairment of the Japanese economy by the earthquake, and periodic EU sovereign debt crises had resulted in the S&P 500 taking a beating as each crisis unfolded. The deciding factor in what stalls the S&P 500 Post-Great Recession Rally for the intermediate term will be slower USA and Global economic growth. There are now indications that both USA and Global growth is slowing, expanding at a slower rate.

S&P 500 Macro View The SPX continues above the 1300 - 1305 area, which was the closing peak of the August 2008 rally. The SPX is below the February 18, 2011 multi-year closing high of 1343. The S&P 500 is neutral, adrift with no Q1 earnings momentum so far to propel upwards. All negative news is also priced in and the SPX found support this past week at the 20 day average, 1314. The S&P 500 could ultimately reach 1343 and then upwards towards 1400 if Q1 2011 economic growth data begins showing Q4 2010 has been exceeded in Q1 2011. This continues to appear possible, but the probability is decreasing and overall March economic data is showing growth, but not an increasing expansion. Bottom Line: Q1 2011 corporate earnings could still push the S&P 500 upwards above 1343 and towards 1400, but the USA Q1 2011 GDP slowed considerably in March as high oil prices and global turmoil began to weigh heavily. As any (not yet realized) optimism of Q1 2011 corporate earnings peak and fade, it is questionable there is any additional impetus to hold the S&P 500 near, at, or above 1343 and onwards toward 1400.

USA Q1 2011 Q4 2010 corporate earnings, Q4 USA economic growth, and Q4 global economic growth exceeded Q3 2010 and propelled the S&P 500 above the 1300 benchmark. The BEA third estimate for Q4 2010 was disappointing, in our view, at +3.1%. With the higher oil prices and ongoing international crises, we now estimate the USA GDP for Q1 2011 at a maximum +3.0%, about a break-even economy for jobs growth. We also estimate Q1 2011 corporate earnings should meet and exceed Q4 2010 in general. However, we are now concerned that the Q1 2011 economic data will indicate that at least the USA economic "recovery", if not the global economic "recovery", has slowed, not stalled. 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 December 22, 2010 to the current close. This chart illustrates recent price interactions, including with the February high and March low.

Noteworthy Closing Prices
Current Close: 1319.68
2011 High: February 18 1343.01
2011 Low: March 16 1256.88
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: ascending 25d sma < slightly ascending 50d sma since 3-25-11, first time since 9-24-10, neutral/bullish
Long Term Trend: SPX > 10 month ema = 1239.94, bullish
Key Resistance: 1320-22, 1330s in general esp 1335-1336 recent peak, recent multi-year peak 1343
Key Support: 20d avg 1319, 50d avg 1315, 1305, 1300 
Moving Averages: continues above all averages monitored: 20d, 25d, 50d, 100d, 200d sma's
Uptrend Line: above since 8-31-10, line from 3-9-09 closing low of 676.53 up thru the 7-2-10 closing low of 1022.58
Downtrend Line: below since 4-6-11, pinned April 1-5, 7-8, 11, line 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 = 58.24 is reasonable, ascending
RSI 28 day = 49.49 is reasonable, descending
MACD (12,26,9) = -1.30, continues descending

Conclusion Short-term we are bullish, intermediate term we are bearish, and long term we are bullish. All is contingent on oil prices, in our estimation. The SPX rallied and almost negated prior losses resulting from the global turbulence but is now -1.74% below the February 18 multi-year high. USA and Global economic data to-date for March has generally dipped and was not as robust as February. Consumer confidence has dropped on rising oil prices, as expected, although there may have been a positive bounce in April. The S&P 500 has rallied back above 1300 plus the 20 and 50 day simple moving averages. We have maintained there is an upside bias for the S&P 500 to 1350 and 1400. This upside bias still exists through earnings season. However, if oil prices continue high into May, this will wipe out the earnings season rally by or in May. A May correction and pullback will ensue as more economic data is dragged down by high oil prices. A test of the multi-year high of 1343 continues to appear imminent but both ongoing positive economic data and strong Q1 2011 earnings will be necessary for a new multi-year high above 1343. The intermediate term trend indicator is now neutral/bullish and the long term trend has continued bullish since September 2010.

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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