Saturday, July 16, 2011

S&P 500 Down -2% for Week on Increasing Uncertainties (Chart) *Earnings season fails to rally equity markets*

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S&P placed the United States on CreditWatch Negative this past week, meaning there is a 50% chance of a credit rating downgrade within 90 days


S&P 500 The S&P 500 closed the week at 1316.14 on Friday, July 15, 2011. The S&P 500, SPX, was down -2.06% for the week, is now down -0.34% for July, was down -1.83% for June, and is up +4.65% for 2011. SPX is up +94.54% since the March 9, 2009 market bottom which was 858 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 -3.48% below that multi-year closing. That closing exceeded the June 6, 2008 closing of 1360.68. The current close continues 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 VIX closed the week on Friday, July 15, 2011 at 19.53, up a strong +22.45% for the week. VIX rallied above the 20, 50, 100, and 200-day moving averages this past week. The now slightly ascending 50d avg dropped below the now mostly level 100d average on May 23 - a third Death Cross. The 100d avg crossed below the now descending 200d avg on November 11, 2010 - a second Death Cross. The 50d avg has remained below 200d avg since October 8, 2010 - the first Death Cross. However, all three moving averages, the 50, 100, and 200-day averages have converged.

S&P 500 Macro View The SPX is at the 100-day average and continues above the 1300 - 1305 area, which was the closing peak of the August 2008 rally, just before the Financial Crisis in September 2008. Further above is the February 16, 2011 prior multi-year closing high of 1343, which the SPX failed to sustain a rally above last week. We now believe that 1353, which is 100% of the March 9, 2009 market cyclical closing low of 676.53 is the most important level and currently the S&P 500 cannot be sustained above. Much higher is the April 29, 2011 multi-year closing high of 1363, which is currently unattainable.

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


S&P 500 Daily Chart Below is the SPX daily chart from February 7, 2011, to illustrate recent price interactions with the current price.

Noteworthy Closing Prices
Current Close: 1316.14
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: ascending 25d avg less than descending 50d avg since 4-21-11; SPX is just above 25d and 50d avgs, neutral/tenuously bullish
Long Term Trend: SPX greater than 10 month ema = 1282.89 since September 2010, tested in June, bullish
Key Resistance100d avg 1316, 1325, 1328-1329, prior multi-year closing high 1343, 1353
Key Support100d avg 1316, 50d avg 1313, 20d avg 1309, 200d avg 1277
Moving Averages: at level 100d; above ascending 20d, descending 50d, ascending 200d avg
Uptrend Line: above since 6-28-11; line from 3-9-09 cyclical closing low of 676.53 up thru the 7-2-10 closing low of 1022.58
Downtrend Line: below since of 7-8-11, had been 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 = 66.10 is reasonable, ascending
RSI 28 day = 55.38 is reasonable, ascending
MACD (12,26,9) = +0.29, descending, 7-7-11 +9.45 was multi-year high


Conclusion The S&P 500 is in a dilemma, positive earnings reports and negative economic data plus European and USA sovereign debt and fiscal crises. Ultimately this may mean an overall neutral tendency with one day up and one day down. The problem is that with earnings season winding down into August, the USA debt ceiling Day of Reckoning on August 2 could be devastating if a satisfactory bipartisan compromise is not reached. The EU Sovereign Debt Crisis also places downward pressure on the equity markets. The current earnings season should provide some support for the S&P 500 this next week. Longer-term, all is contingent on oil prices, in our estimation. 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 a fiscal and economic quandary that has been years in the making by both political parties, but a drastic cut in federal spending, as opposed to a phasing down, would be harmful. The intermediate-term trend indicator continues neutral/tenuously bullish. The long-term trend continues bullish and has continued overall bullish since September 2010. We are now neutral to bullish short-term (July), now neutral to slightly bearish for the intermediate-term (6 months), and continue bullish long-term (12 months).

Disclosure & Portfolio 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. August 2, 2011 is the Day or Reckoning for a bipartisan resolution of the budget and debt ceiling. We do not believe a "satisfactory" compromise will be reached by August 2. By satisfactory, we mean what S&P means, a "credible, medium-term fiscal plan". We believe the USA credit rating, both short-term and long-term, is at high risk of being downgraded. To err on the side of caution, we plan on exiting all long equity positions by August 2 and live to play another day...

THE BIG QUESTION What happens now? Up, Down, Sideways?

Global and USA Uncertainties
1) First concern since March has been high oil prices resulting from the Libyan revolution and other Arab uprisings (Arab Spring) creating actual and potential supply disruptions. U.S. crude and Brent crude closed the week up at $97.24 and down at $117.66, respectively. Oil prices continue below the highs of late April and early May, but are trending upwards and persistent higher oil prices have become a drag on USA and Global economic growth. Oil prices have rallied above the intermediate-term lows reached in late June and increased for 3 consecutive weeks.
2) Second concern (and rising on this list to First Concern by August 2, the Day of Reckoning) is now the USA funded debt of $14+ trillion, the debt ceiling deadline of August 2, and the heated political and social debate. Moody's has already placed the USA on review for a possible downgrade and previously said it would downgrade the United States to the "Aa" range, still considered investment grade. Moody's has warned the USA to resolve the debt ceiling political deadlock or a short-term negative outlook rating is imminent. Fitch has stated they will cut the U.S. ratings to "restricted default" after a few missed debt payments. Previously, Fitch has stated that the USA would be placed on "watch negative" if Congress did not raise the debt ceiling by August 2. In addition, if the USA misses the August 15 coupon payment, then Fitch would place the USA rating on "restricted default". S&P in April had previously placed the U.S. rating on negative outlook, which means a downgrade is likely in 12-18 months. At that time, S&P cut the USA to a long-term negative outlook for sovereign credit. Now S&P has placed the USA on CreditWatch Negative with a 50% chance of a credit rating downgrade in the next 90 days. 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. August 2, 2011 is the Day of Reckoning and a bi-partisan resolution of this problem does not appear probable, in our opinion.
3) Third concern is the deteriorating USA economic data and recent dismal employment report. This appears to be mostly the result of the first concern, persistent higher oil prices. Consumer confidence continues at historically low levels and now is at the lowest since the dismal days of March 2009, the unemployment and underemployment rates continue high, the housing market is depressed, the financial system is still weak, and the recovery has slowed significantly. A double-dip recession is possible, but still does not appear probable. Continued inadequate (slow to very slow) economic growth is probable.
4) Fourth 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. The sovereign debt and fiscal effectiveness of Greece has been in the forefront and the government has approved yet more austerity measures to buy yet more time and to receive yet another bailout. Italy is now becoming news and Portugal, Ireland, Spain, and even Belgium are in the near background. In addition, the peripheral Euro Zone countries, Eastern Europe, are ongoing sovereign debt problems.
5) Fifth concern is the catastrophic earthquake and tsunami that hit Japan, the world's third largest national economy. The resulting nuclear radiation crisis and the negative economic impact of this ongoing crisis and global implications have affected Japan, China, USA, et. al. Japan is officially in a recession as of the quarter ended 3-31-11 with a negative GDP for 2 consecutive quarters. However, Japanese economic output is rebounding rapidly from the crisis.
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 and food, which then increases prices for governments, businesses, and consumers worldwide. This is also dragging down USA and Global consumer sentiment.
7) Seventh concern is the Federal Reserve policies and the end of quantitative easing (QE2) as of June 30, 2011. The Fed has ceased most monetary intervention and support for the second time since the Financial Crisis in the autumn of 2008. The extent of this impact, if any and much debated, will be seen later this summer. Hopefully, the negative impact will be minimal and then can be removed as a concern by the end of July. Chairman Bernanke stated at the April Federal Reserve press conference that he thought it was unlikely that the end of quantitative easing would have any significant effect on markets or the economy. There is a possibility of another round of monetary intervention, QE3!

USA and Global Economy Overall, the April, May, and June economic data has been disappointing and indicates the expansion is 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 the economic data. We continue with our assessment and statement from prior months: 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 some even now dismal. Robust expansion has down-shifted to slow, very 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 that by the end of July the expansion could stall completely for the USA.

The Future We have pulled out the Magic 8 Ball, which continues overall negative, to divine what lies ahead for the S&P 500. The bulls, aka greed and optimism, and bears, aka fear and pessimism, have reached a standoff - positive earnings reports and negative economic data. Corporate earnings season should provide some support for the S&P 500 as there should be overall positive earnings reports. Downshifting USA and Global economic growth has stalled the S&P 500 Post-Great Recession Rally. European and USA sovereign debt and fiscal crises will probably push the S&P 500 down after earnings season unless economic data rebounds significantly.

USA 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. February 2011 was about the peak of USA and Global economic growth. March 2011 brought rising oil prices plus the catastrophic tsunami to Japan. The U.S. Bureau of Economic Analysis Q1 2011 final GDP estimate of +1.9% was borderline dismal.  The Q2 2011 economic data to-date indicates the USA and Global economic expansion has slowed further in April, May, and June and is near stalling. Therefore, we estimate the Q2 GDP at below +2.0%.

U.S. Dollar The U.S. Dollar Index closed the week on Friday, July 15, 2011 at 75.52, flat at +0.12% for the week. The USDX is above the descending 20-day, ascending 50-day, and  descending 100-day averages, but continues below the descending 200-day moving average. The USDX has been trading in a range since March 2011.


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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