Matrix Markets: S&P 500 Drops on EU & USA Concerns (Chart) *Downside risk increasing*

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The Global Economic Recovery has slowed significantly

S&P 500 OVERVIEW

S&P 500 The S&P 500 closed the week at 1154.23 on Friday, September 9, 2011. The S&P 500, SPX, was down -1.68% for the week, is down -5.30% for September, was down -5.68% for August, and is down -8.22% for 2011. SPX is up +70.61% since the March 9, 2009 market bottom. The SPX closing at 1363.61 on April 29, 2011 was a multi-year closing high and is now -15.35% below that peak.

Extreme Trading Range Since August 5, the S&P 500 has traded in a very wide trading range (see chart below) from an intraday low of 1101.54 on August 9 to an intraday high of 1230.71 on August 31. That is a 129.17 point trading range. SPX closed below the mid-point (1166) of this trading range on Friday, September 9.

Bear and Correction Territory The S&P 500 has been below the level 200-day moving average (1284) since August 2, 2011. The S&P 500 has not been able to rally and stay above the slightly ascending 400-day moving average (1208). The SPX is now -15.35% below the peak, multi-year closing high of 1363.61 on Friday, April 29, 2011. All of these define a bear and correction market and territory. In addition, the 50-day moving average crossed below the 200-day moving average, a Death Cross, on Friday, August 12. Further, the 100-day moving average crossed below the 200-day moving average on Wednesday, September 7, another Death Cross.

Bear Flag A bear flag has developed (see chart below) that has been confirmed by the trading through 9-9-11. This continuation pattern, ultimately to the downside, has become ominous. This pattern, when confirmed by a breakdown through the lower channel, sets up a severe test of the August 8 and 10 closings of 1119-1120 and the August 9 intraday low of 1102.

Volatility VIX closed the week on Friday, September 9, 2011 at a higher 38.52, up +13.56% for the week. VIX is now above the level 20-day average and continues well above the 50, 100, and 200-day moving averages.

U.S. Dollar The U.S. Dollar Index closed the week on Friday, September 9, 2011 at a much higher 77.72, up +3.85% for the week. There has been a significant rally the past 2 weeks and this past week was the largest rally since the week ended 8-13-10! The U.S. Dollar Index had previously been flat, quiet, up a mere +0.22% from July 22 through August 31. The USDX continues above the 20, 50, 100-day averages and now has rallied and closed above the 200-day moving average 9-13-10! The USDX has now rallied and closed above the trading range that began in mid-March 2011. Overall, the rally is the result in a crash of the Euro, which closed at the 400-day moving average on 9-9-11.

S&P 500 Macro View The negative USA and Global fiscal, economic, and political uncertainties have stifled any rally above 1200 and downside risk is increasing. A test of the ultimate support at a deep bottom closing of 1119-1121 on August 8 and 10, respectively, appears inevitable. 1200 continues as the benchmark resistance and the sentiment boundary between some optimism and continued significant uncertainties. SPX has dropped below the descending 20-day average, cannot sustain a rally above the 400-day moving average, and continues well below the 50, 100, and 200-day averages. In reviewing various ultra-long, multi-year indicators, the S&P 500 is below these at the lower end of the aforementioned trading range and above at the higher end. Therefore, SPX continues at the cusp, the dividing line, of an ultimate bear or bull market, but the evidence is accumulating for a downside test to 1100 and even potentially to 1000.
* The SPX has yet to sustain a rally above the 400-day moving average of 1208, which was initially dropped below on August 4.. The S&P 500 continued below this past week. SPX actually closed at the 400-day average on August 15, which appeared to act as resistance.
* The SPX pinned upwards to the 300-day average on August 31, the peak of the recent rally. SPX pinned 1230.71 and the 300-day average was 1230.18 on that day. The S&P 500 has been below this average since August 4.
* SPX has not been able to rally and close above the Fibonacci 23.6% retracement. The Fibonacci range utilized is from the 3-9-09 market cyclical closing low of 676.53 up through the 4-29-11 multi-year closing high of 1363.61. The Fibonacci 38.2% retracement is approximately 1100, which is about the 8-9-11 intraday low of 1102.

Economic and Market News Information about the USA and Global economies plus the USA financial system are posted at Boom Doom Economy, Financial Controls, Baidu Planet, and Neo Solomon.

S&P 500 DAILY CHART

S&P 500 Daily Chart Below is the SPX daily chart from April 29, 2011 and the multi-year closing high of 1363.61, to illustrate the decline and recent trading range.

Noteworthy Closing Prices

Current Close: 1154.23

2011 High: April 29 1363.61

2011 Low: August 8 1119.46

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: strongly descending 25d avg less than descending 50d avg since 8-9-11; SPX is below both 25d and 50d avgs, bearish

Long Term Trend: SPX less than descending 10 month ema = 1247 beginning WE 8-5-11, bearish

Key Resistance: 20d avg 1178, 1200 benchmark, recent peak close 1219, trading range high 1231
Key Support: trading range lows 1121-1119 and 1102-1101

Moving Averages: now below 20d avg, far below 50d, 100d, 200d avgs

Uptrend Line: below since 7-27-11; 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 = 55.83 is reasonable, descending

RSI 28 day = 40.72 is near oversold, descending

MACD (12,26,9) = +3.61, descending, multi-year low 8-10-11 (-19.97); multi-year high 8-31-11 (+11.42)

S&P 500 SUMMARY

Conclusion A consolidation and stabilization continues, but the downside risk is increasing as the bear flag has been confirmed and is in play. In addition, the U.S. Dollar has rallied strongly to the upside out of a trading range from mid-March 2011 on Euro weakness. SPX at 1154 closed the week below trading range mid-point of 1166. The USA and Global fiscal, economic, and political uncertainties were heightened this past week plus high frequency trading increases the volatility. Additional significant negative news, such as deteriorating USA economic data, ongoing USA political ineffectiveness, and/or another EU sovereign debt crisis bombshell will drive the S&P 500 deeper into the trading range and ultimately a test of the bottom. News-driven corrections downwards and oversold bounces upwards should continue to occur as the consolidation continues. If a USA double-dip recession does occur, the bottom is not in. The intermediate-term trend indicator continues bearish. The long-term trend indicator continues bearish. At the present level of the S&P 500, we are now bearish for September, expecting a test of the trading range bottom, continue neutral to slightly bearish 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..

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

Global and USA Uncertainties

1) First Concern is the USA short-term and intermediate-term economic, fiscal, and political status. The bipartisan debt ceiling, budget, fiscal agreement ultimately accomplishes very little and political ineffectiveness is now a significant portion of this uncertainty. The economic indicators are dismal to near-abysmal and the risk of a double-dip recession continues moderate to high. The fear of a double-dip recession continues very high and some parts of the economy are already in or near a recession and even a depression (e.g., housing market). Citizen, consumer, and business, confidence and sentiment continues at historically low, recession levels and the unemployment and underemployment rates continue high. Due to abysmally low citizen, consumer, and business sentiment, a double-dip recession could become a self-fulfilling prophecy. The GDP revisions revealed a deeper Great Recession and a less robust, slower recovery. On top of all this, S&P downgraded the USA and related agencies credit ratings from AAA to AA+ and the U.S. government, via the FHFA, has sued the major USA and European banks for fraud regarding mortgage-backed securities.

2) Second Concern is the EU sovereign debt and related financial system 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 problems of Greece have been in the forefront. Ultimately this overall crisis will result in insolvent banks to be bailed out. In the future in various Eurozone countries, there will be more austerity measures to buy yet more time to receive yet more bailouts. Italy is next and is attempting to be proactive and preemptive. Portugal, Ireland, and Spain continue in the near background. In addition, the peripheral Euro Zone countries, Eastern Europe, are ongoing sovereign debt problems.
3) Third Concern is the Global short-term and intermediate-term economic status. Economic growth continues slowing on a worldwide scale and the USA and Eurozone are becoming a drag on growth.
4) Fourth 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.
5) Fifth Concern, a concern since March but rapidly dropping in intensity, 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 (Light Crude NYME) and Brent crude closed the week up at $87.24 and up at $112.53, respectively. Light Crude NYME has increased the past 3 weeks, but is well below the peak close of $113.88 on April 29, 2011, which is encouraging. Oil prices are now well below the highs of late April and early May and all the way back to the pre-oil spike prices of February 2011. This should mitigate the drag on USA and Global economic growth.

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 bears, aka fear and pessimism, continue in overall control and the bulls, aka greed and optimism, have a line in the sand at 1121-1119 and 1102-1101. The negative USA and Global fiscal, economic, and political uncertainties have overwhelmed anything positive. Downshifting USA and Global economic growth plus the USA and EU fiscal crises stopped the S&P 500 Post-Great Recession Rally. The USA equity markets are in a consolidation and stabilization phase at this point, with little impetus upwards or downwards out of the trading range. However, the technical indicators are portending an increasing downside risk.

USA Credit Rating Overview Fitch Ratings affirmed USA at AAA, with a stable outlook, on August 16, 2011. Standard and Poor's lowered the credit rating of the United States of America from AAA to AA+, with a long-term negative outlook, on August 5, 2011. The negative outlook indicates the rating could be lowered again within the next two years. Moody's Investor Service affirmed the USA at AAA, but with a negative outlook, on August 2, 2011. The USA has never before had less than a AAA credit rating by these agencies. However, the USA was previously downgraded by several lesser-known rating agencies: S&P Was Not First Rating Agency to Downgrade USA (Video) *China's Dagong Global Credit never rated America at AAA*.

USA 2011 February and March 2011 was about the peak of USA and Global economic growth. March 2011 brought rising oil prices, Arab Spring, plus the catastrophic tsunami to Japan. The U.S. Bureau of Economic Analysis Q1 2011 revised GDP estimate of +0.4% was near-abysmal. The Q2 2011 second estimate of +1.0% is dismal. The revisions of 2008, 2009, and 2010 GDP data revealed a slower recovery and worse Great Recession than previously reported. The Q3 2011 economic data to-date indicates the USA and Global economic expansion has slowed further in July and August and will probably continue at low levels in September. Therefore, we now estimate the Q3 GDP below +1.5%. The risk of a double-dip recession is moderate to high, the fear of one is very high.

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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