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I recently wrote a piece about how I feel we are due for a correction in the market. This was based on how our country's debt was climbing to very high levels and how our GDP was not keeping up. As I was having this article edited for publishing, it was announced that our GDP has taken a huge backwards step, adding to the problem by regressing 0.1% this past quarter when it was expected to grow 1%. This amplifies our problem within our country, yet the S&P 500 remains above the 1500 level and SPY (NYSEARCA:SPY) has followed suit.

I still believe in the factors I wrote about previously, but now have some new data and thoughts to add to my theory. Below is some technical data along with basic fundamentals about why I believe the S&P will see 1400 again before 1600. Although I have written articles making these predictions before (and eaten my crow for being wrong) I believe the data here (as well as using fundamental common sense to analyze it) shows we are due for a correction in the near future.

Bollinger Bands:

SPY over the last year:


(Click to enlarge)

As we know, the bands give us a volatility indication of its high and low points. You can see here on at least 7 different occasions in the last 12 months, SPY has touched (or went above) its upper band and then fairly soon after, a pullback occurred. Most of these pullbacks were simple corrections of 2-3%. Some will say this based on the factors that day, I tend to disagree. You will see similar behavior with other stocks. A price rise followed by a pullback. It is part of the way a stock behaves, a fundamental of trading.

However when there was extended contact with the upper band (over the course of 2-3 months as in July through September) the pullback was far more defined and painful. You can see the price dip from 146.33 in mid September all the way back to $135.93 by early November. You could argue that part of this was the sell-off after the election, but the price had already closed down to $142.96 on the 6th (Election Day) and fell to $139.72 the next day (when the sell off occurred). It still fell another $4 for a total drop of over 8% since the decent first began.

If you notice, the last 45-60 days SPY has had a similar stretch to the one in September. These pullbacks happen and we are in line for another one shortly of at least 4-5%.

11 in a row:

SPY has now closed up for 9 out of the 11 days in this month. As mentioned above, a fundamental of trading is a stock typically grows steadily over time. There are peaks and valleys, a common trend. SPY has not been that way for a long time and is in my eyes due for a valley. See the chart below

Date Closing Price
1-14 $146.97
1-15 $147.07
1-16 $147.05
1-17 $148.00
1-18 $148.33
1-22 $149.13
1-23 $149.37
1-24 $149.41
1-25 $150.25
1-28 $150.07
1-29 $150.66

What is even more interesting is the only 2 days that SPY did not close up it stayed relatively flat; down only $0.02 on 1/16 and $0.18 on 1/28. Any stock no matter how good the technicals are cannot sustain a rally without some sort of pullback. When you combine this with the fact that SPY is up nearly 20% in the last 6 months, the question is not if but when a pullback will occur.

Our nation and other factors:

I have mentioned before about our state of the nation but a few things also pending could help this eventual pullback come to fruition both quicker and deeper. For one there is talk of a budget sequester on the horizon. If it goes into effect, I expect our GDP to decrease by 1% and unemployment to increase as a result. Should that happen (or a worst case scenario a default down the road) a more defined pullback will occur. Remember, our Debt vs. GDP is over 100% now, our economy cannot afford more bad news without repercussions. Compared to the last time the S&P topped 1500, it was a manageable 58%.

Also some big money is got into the volatility index VIX (VIX) with a purchase of 100,000 February 16 calls at $0.55 a share last week. That is some serious money betting that the index will jump up 30% 10 days from now which would signal a drop in SPY. This investor will not be the first, people tend to follow the big money and others will be following suit of this $5.5 million investment.

The last time the S&P was at the 1500 level, our GDP was similar and debt was 1/2 as much. What is different here that justifies the price being where it is? Besides our debt, we have a high unemployment level, there are still worries about the budget, the debt ceiling, trade deficits. I do not feel the stock is worth (at this point) where it is at. It is overpriced plain and simple and is riding a wave of bulls. In the end the math will catch up to human sediment, always has.

Should things begin to point upwards (lots of corrections needed by our leaders) I do believe 1600 is possible, but not now. The news of our GDP regressing is a bad sign, I feel a pullback is imminent and will probably bring us back down at least 3-4% in the short term. Long term I have said all along we are a country that spends too much in correlation to our GDP. That problem has gotten worse with the news this morning. Our debt is reaching epic proportions and we need to correct the problem now. Many on the street agree with me, now we just need to get our leaders behind it before it is too late. if something is not done, expect to see below 1400 in the near future and much sooner than 1600.

Source: Why The S&P Will See 1400 (Or Lower) Before 1600