Is the S&P500 Set Up for a Short-Term Technical Rally?

| About: SPDR S&P (SPY)

Bloggers from Maine to Hawaii seem to be drifting of late towards a more bullish short-term outlook. There are high hopes all around for a bear market rally. Well, maybe, but I’m skeptical that it will attract all but the most aggressive traders.

The various rationales for this point of view run from gushing embraces of the “Obama Stimulus Effect” to the markets’ historical seasonal patterns, to the more simplistic although no less fervent belief that “what goes down has to eventually come up”, and the good old stand by, “do you know how oversold this market is?”

Earnings season has become “warnings season”; the employment picture is dismal, despite the latter day spinning Retail is in something pilots refer to as a “graveyard spiral”, and Mutual Fund/Hedge Fund redemptions are downright scary. This last fact is being spun into a big positive as “money on the sidelines”! As if those once enthusiastic investors, now having experienced first hand the frolicsome rite of seeing their life savings clipped by 40% or more, are now salivating on the sidelines, like the freshman contingent of the varsity football squad, just chomping at the bit for another chance in the big game!

Yes, we have had a dismal time of it from summer’s end. The drop from mid-October 2007 has been traumatic for everyone without exception, and the trip down has been littered with the bones of “bottom-callers”!

Yet, at the present time there are many calling for at least a “short-term bottom”; a rather hedged call at best, and another “bear market rally”. These predictions could use some examination.

  • Oversold? We were in much deeper oversold territory (based on stochastic, TRIX, and RSI) back in October/November. The rally off the November lows failed in early January, and has NOT resulted in another drastically over sold condition. (This is moot point to many who would say that oversold markets are quite capable of further declines!)
  • The “Obama Stimulus Effect” has failed to ignite significant confidence among investors. This is not to say that there might be no exciting possibilities buried within some of the proposals! “Obama Hope” has not as yet been translated into concrete policy that investors can confidently hitch their wagons to. (Some have even raised more questions than they have addressed!)
  • The S&P500 fundamentals are still not stirring hopeful optimism. It is often claimed that the market moves in anticipation of market fundamentals. This is generally true. More difficult to quantify are the first stirrings of that glimmer of investor confidence that sparks a real, sound rally! And that is exactly what appears to me to be lacking! We appear to lack confidence: in the markets, in our leadership, and yes, even in ourselves!
  • The S&P500 technicals, although “frothy”, are still inconclusive. A good rally consists of higher highs and higher lows, with increasing and significant volume, and rising 5, 10, and 15 day moving averages!

The charts below show the last 100 days of the price action of the S7P500:

Click to enlarge

(Chart from Chas. Schwab ‘StreetSmart Pro’)

The late January breakout failed, and we have yet to consolidate! This is highly inconclusive, and a most dangerous lure for the over-aggressive!

Click to enlarge

(Chart from Chas. Schwab ‘StreetSmart Pro’)

The congestion above is obvious, and a breakout or breakdown is inevitable. However, the primary trend is still down, as the declining MA’s indicate, and breaks tend to follow the primary trend!

In conclusion, I find it far too early to be calling for a decent rally out of this quagmire! If and when the S&P500 can break and hold above 880 or higher, we might have better reason to tentatively wade in… one toe at a time! Until then, prudence dictates keeping your powder dry!

It is far, far easier to make up for lost opportunities that it is to replace lost cash!

Stock position: None.