S&P 500 The S&P 500 closed the week at 1300.16 on Friday, June 3, 2011. The S&P 500, SPX, was down -2.32% for the week, is already down -3.35% for June, was down -1.35% for May, and is up +3.38% for 2011. SPX is up +92.18% since the March 9, 2009 market bottom which was 816 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 -4.65% below that multi-year closing. That closing exceeded the June 6, 2008 closing of 1360.68. The current close is now just 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 3, 2011 at 17.95, up +12.33% for the week. VIX has rallied above the 20, 50, and 100-day moving averages. VIX continues below the 200-day simple moving average but has tested this benchmark on May 23 and June 3. The now descending 50d sma dropped below the now descending 100d average on May 23 - a third Death Cross. The now mostly level 100d sma crossed below the now descending 200d sma on November 11, 2010 - a second Death Cross. The 50d sma remains below now descending 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.
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 at $100.22 and $116.05, 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) A Seventh concern is the Federal Reserve policies and the end of quantitative easing (QE 2) 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 economies. However, 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 now at 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 1363. Bottom Line: Optimism generated by Q1 2011 corporate earnings is history and it is improbable there is any additional impetus to hold the S&P 500 near, at, or above the 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 back at 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. Even with the initial higher oil prices and ongoing international crises, we estimated the USA GDP for Q1 2011 at a maximum +3.0%, about a break-even economy for jobs growth. 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, but has not stalled.
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: 1300.16
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
Intermediate Term Trend: plunging 25d sma greater than level 50d sma since 4-21-11; SPX is below 25d and 50d sma's, bearish
Long Term Trend: SPX greater than 10 month ema = 1271.89 since September 2010, bullish
Key Resistance: 100d avg 1318, 50d avg 1331, 20d avg 1332
Key Support: at support benchmark 1300, 1298, 1294-1295
Moving Averages: continues below decreasing 20d, level 50d, ascending 100d; continues above ascending 200d sma
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 4-29-11, 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 = 34.92 is oversold, descending
RSI 28 day = 42.57 is near oversold, descending
MACD (12,26,9) = -3.46, descending
Conclusion We are now bearish short-term, continue neutral but leaning bearish for the intermediate-term, and bullish long-term. 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. 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 and has struggled with the now descending 20-day average and now level 50-day average. Now the SPX is also below the 100-day average. The higher 100-day average (1318) appears to be the higher side of the SPX trading range. A test of the much lower 200-day average (1248) does not appear imminent. Languishing, sideways trading with a slight downside bias appears the most probable short-term outlook. The intermediate-term trend indicator is now bearish 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.
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