Friday, June 10, 2011

S&P 500 Continues June Swoon (Chart) *Down 6 consecutive weeks*

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USA economic growth has slowed to near-stalling

S&P 500 Overview

S&P 500 The S&P 500 closed the week at 1270.98 on Friday, June 10, 2011. The S&P 500, SPX, was down -2.24% for the week, is already down -5.52% for June, and is up a mere +1.06% for 2011. SPX is up +87.87% since the March 9, 2009 market bottom which was 823 days ago. The SPX closing at 1363.61 on Friday, April 29, 2011 was a multi-year closing high, the highest close since the closing of 1404.05 on June 5, 2008. SPX is now -6.79% below that multi-year closing. That closing exceeded the June 6, 2008 closing of 1360.68. The current close is now well below 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, June 10, 2011 at 18.86, up +5.07% for the week. VIX continues above the 20, 50, and 100-day moving averages. VIX is now testing the descending 200-day simple moving average and probably will close above soon. The now level 50d sma dropped below the now slightly ascending 100d average on May 23 - a third Death Cross. The now slightly ascending 100d sma crossed below the now descending 200d sma on November 11, 2010 - a second Death Cross. The 50d sma remains below 200d sma since October 8, 2010 - the first Death Cross. The intermediate-term indicator became bullish on Friday, June 3. The long-term indicator continues tenuously bearish, but will probably become bullish this next week.

U.S. Dollar The U.S. Dollar Index closed the week on Friday, June 10, 2011 at 75.09, up +1.43% for the week. The USDX rallied above the level 20 and descending 50 day averages today, but continues below the descending 100 and descending 200 day averages.

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

Global and USA Uncertainties
1) First concern for weeks has been high oil prices resulting from the Libyan revolution and other Arab uprisings creating potential supply disruptions. U.S. crude and Brent crude closed the week ended June 3, 2011 down at $99.29 and $118.59, respectively. Persistent higher gas prices have become a drag on USA and Global economic growth.
2) Second concern is now the deteriorating USA economic data. This appears to be mostly the result of the first concern, persistent higher oil prices. Consumer confidence remains at historically low levels, the unemployment rate continues high, the USA economy is not generating an adequate number of jobs, and the recovery has slowed significantly. A double-dip recession is possible, but still does not appear probable.
3) Third concern is the catastrophic earthquake and tsunami 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 have begun to show in economic output both for Japan and on the worldwide economy. Japan is officially in a recession as of the quarter ended 3-31-11 with a negative GDP for 2 consecutive quarters.
4) Fourth concern is now the USA funded debt of $14+ trillion and the heated political and social debate. The S&P cut the USA to a long-term negative outlook for sovereign credit and now Moody's has warned the USA to resolve the debt ceiling political deadlock or a short-term negative outlook rating is imminent. In addition, if spending is actually cut by any material amount, this will negatively impact the economy (and already has), rightly or wrongly, regardless of political beliefs.
5) Fifth concern is the EU sovereign debt crisis, which waxes and wanes in its effect on equity and credit markets. This problem is chronic, systemic, and therefore a long-term issue.
6) Sixth concern, a medium-term and long-term uncertainty, is the growing demand by emerging national economies (e.g. BRIC) for commodities, including oil, which then increases prices for governments, businesses, and consumers worldwide.
7) Seventh concern is the Federal Reserve policies and the end of quantitative easing (QE2) as the June 30, 2011. The Fed is ceasing most monetary intervention and support for the second time since the Financial Crisis in the autumn of 2008. The extent of this impact, much debated, will be seen later this summer. Hopefully, the negative impact will be minimal and then can be removed as a concern.

USA and Global Economy Overall, the April and May economic data has been disappointing and indicates the expansion is now slowing significantly for the USA and to a lesser extent for the World. The extent of the negative impact of sustained higher oil prices and global turmoil is being shown in economic data. 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 economiesHowever, recent economic data is becoming discouraging and near-dismal. Robust expansion has down-shifted to slow and even near-stalling in some cases. Up to a point there is remarkable resiliency in both the USA and Global expansion absorbing higher oil prices and crises, but we are concerned in a another month or two the expansion could stall completely for the USA.

The Future We have pulled out the Magic 8 Ball, which is becoming more clear, and negative, to divine what lies ahead for the S&P 500. The bears, aka fear and pessimism are clearly having their concerns realized and trumping the bulls, aka greed and optimism. Corporate earnings season, which was positive, is over and the economic data is overall negative. The deciding factor in what stalls the S&P 500 Post-Great Recession Rally will be slower USA and Global economic growth. Both the USA and Global economic growth is slowing and therefore expanding at a slower rate. Presently there is insufficient positive force to drive the S&P 500 upwards significantly.

S&P 500 Macro View The SPX is below the 1300 - 1305 area, which was the closing peak of the August 2008 rally. The SPX is well below the February 18, 2011 prior multi-year closing high of 1343, which is key resistance. Above that is the April 29, 2011 multi-year closing high of 1363Bottom Line: There is no positive impetus to rally the S&P 500 near, at, or above the April 29, 2011 multi-year high of 1363.

USA Q1 2011 and Q2 2011 Q4 2010 corporate earnings, USA economic growth, and global economic growth exceeded Q3 2010 and propelled the S&P 500 above the 1300 benchmark. Now the S&P 500 is below that level. The U.S. Bureau of Economic Analysis final estimate for Q4 2010 was disappointing, in our view, at +3.1%. The BEA Q1 2011 second estimate of +1.8% is borderline dismal. Q4 was to be the big quarter for the USA, with a dip in Q1 as holiday consumer spending, and some optimism, faded. This dip has been greater than we expected, mostly as a result of persistent higher oil prices. The Q1 2011 economic data indicates the USA and Global economic expansion slowed, but did not stall. The Q2 2011 economic data to-date indicates the USA and Global economic expansion has slowed further in April and May and is near stalling.

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 April high and March low.

Noteworthy Closing Prices
Current Close: 1270.98
2011 High: April 29 1363.61
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: plunging 25d sma greater than descending 50d sma since 4-21-11; SPX is well below 25d and 50d sma's, very bearish
Long Term Trend: SPX greater than 10 month ema = 1266.59 since September 2010, tenuously bullish
Key Resistance:  20d avg 1315, 100d avg 1318, 50d avg 1328
Key Support: at support 1270, closing low 3-16-11 1256, 200d avg 1253
Moving Averages: continues below plunging 20d, descending 50d, level 100d; continues above ascending 200d sma
Uptrend Line: just 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: well below since 4-29-11, line from 10-9-07 all-time closing high of 1565.15 down thru the 4-29-11 multi-year closing high of 1363.61
RSI 14 day = 27.60 is oversold, descending
RSI 28 day = 32.20 is oversold, descending
MACD (12,26,9) = -5.53, descending

Conclusion We continue bearish short-term, now neutral for the intermediate-term (6 months), and continue bullish long-term (12 months). All is contingent on oil prices, in our estimation, especially for the intermediate-term and long-term outlook. Persistent high oil prices will ruin everything and a material decrease in federal spending will be the tipping point for a complete stalling of the USA economic expansion into a recession. The USA is in an economic quandary that has been years in the making by both political parties. The SPX has pulled back significantly from the 4-29-11 multi-year closing high of 1363.  A test of the 2011 closing low of 1256.88 (March 16) now appears imminent. In addition, a test of the ascending 200-day moving average of 1253 also appears imminent. The most probable short-term outlook continues bearish. The intermediate-term trend indicator is now bearish. The long-term trend is now tenuously bullish and 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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