How Low Can the S&P 500 Go? 21 comments
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The current bear market has caught many investors flat-footed as they sense that this time it just might be "different". The only thing "different" about this bear market is the "rarity of its severity". We just might be witnessing a development in the reversal of a secular trend. If so, then further correction may occur and it is prudent to at least be proactively aware of the potential downside risks.
To gain a sober perspective, let us step back in time and note that the most recent secular bull market trend may have started on 10/9/74 and ended on 10/19/07 in which the S&P 500 advanced +2112.67%. A bearish retracement of such a move would implicate an Armageddon-like scenario of blood on the street (i.e. Wall Street) of biblical proportions. However, we will be generously less pessimistic in our assessment and start at the point where the S&P 500 bottomed in August and September of 1982 and then broke above its 50 month moving average to advance for a +1296.26% return.
Now, I am not trying to scare anyone into abandoning equities as a wealth creating vehicle, but I will emphasize the necessity of skillful stock selection. For the sake of example and to prove that I am not all doom and gloom, while the S&P 500 contracted -23% from January 1981 through August 1982, more than 60 stocks that currently represent the Russell 1000 index advanced 10% or more during the same period. Some standouts were HANS (+344.55%); CLF (205.16%); RHT (+113.17%); SYMC (98.11%); and CEDC (83.15%). I only mention this to demonstrate that some bulls do survive and thrive in bear markets. In fact, our database can document many examples of such in various bear markets, but that is not the primary purpose of this report. Shall we move forward?
In the fog of war, a cool head prevails. At Hillbent, I try to call it like I see it, but am not afraid to make contrarian calls in either bull or bear markets. Like life itself, the market is full of contradictions that challenge the status-quo. This current bear market is one particularly nasty and bloody war, but I am confident that solid trend and fundamental analysis will prevail against the odds for our readers who remain Hillbent on the Market Direction.
Where was I? Ah yes, returning to the August 1982 through September 2000 bull run. (Sometimes a good Napa merlot on a rainy southern California night up in the mountains with a warm burning fire can lead one astray from the matter at hand. Please pardon the indulgence.) After this point, the S&P 500 fell victim to the tech wreck and corrected -42.97% from 9/12/200 through 2/19/2003. During such a move, the index once again violated its 50 month moving average. It is this secular period with which I am most concerned. After the completion of the last bear market cycle, the S&P 500 index resumed its secular uptrend from 2/10/03 to 10/19/2007 for another +77.56% of upside appreciation. Since 10/19/2007 through 2/20/2009, it has corrected -48.68%, which is where we are right now.
Most pressing is where we go from here. The market dances to its own beat and appears fixated on the limbo (i.e. how low can we go?). In the big picture since August 1982, the S&P 500 remains up +625.50% despite the current bear market. Yet, this wipes out about 50% of the gains in this secular bull market cycle. As mentioned above, it is this secular bull trend-cycle with which I am concerned. Presently, the market is finding support at the October 2002 and March 2003 respective bottoms of 768.63 and 788.90. However, while the market is trading below its 50 month moving average, one alarming difference is the fact that it is also trading below its 200 month moving average. This is not an omen to be ignored.
In applying some of my most reliable technical analysis techniques to the long-term market direction, I prefer to use monthly pivot point values. The monthly chart below shows that whenever pivot point values cross above or below their 13 month exponential moving average, the sustainability of the market direction trend can be quite extended. Unlike month end closing prices, pivot points reflect the average sum of high, low, and closing prices to identify key support levels which are widely followed by prop traders and big money institutions. Closing prices can fluctuate upward or downward on a monthly basis, but pivot point support levels tend to be less volatile in their market direction movement and, therefore, a reliable trend indicator.
Price-Volume analysis also discloses that trading on the S&P 500 exhibits the most bearish relationship, i.e. falling prices and falling volume. Conventional wisdom says that falling prices on falling volume is a good sign in that there are fewer sellers. Professionals know that nothing could be further from the truth. Falling prices on declining volume reflects apathy in the market and prices tend to fall on their own weight. Due to the absence of buyers, it does not take as many sellers to push down prices. Some may scratch their heads and disagree with this rationale, but I beg to differ.
Employing Fibonacci analysis, the S&P 500 has already violated its 50% retracement support level at 838 and looks headed for a full 61.2% retracement to about 665, give or take 20 or 30 points. Incidentally, for the majority of 1996, the market traded between the ranges of 600 to 700 and this marks the next plausible band of support that may see a retest. Mathematically, a 700 level represents another -10% haircut for the value of the index. If you can live with this, then fine. If not, you have been fairly warned and may want to take whatever necessary steps to protect your portfolio or nest egg. Based upon the information I have already provided, I will allow readers the privilege of calculating additional downside percentages.
Although not illustrated in the chart below, the next significant band of support centers around prices ranging from 450 to 500 during the August 1993 to January 1995 period. God forbid that we should test these levels and I’ll stop here since there is no point in ruining the experience of a good Merlot on a rainy southern California night with a warm fire. As the current bear market is a rarity, so is tonight’s atmospheric conditions and fine red wine.
Here's a toast to holding key monthly support levels and being prepared if not…
Monthly Chart of S&P 500 (as of Feb-20-2009)
Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.
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I really tried to read your article but as a fellow Californian you lost me on the Merlot.
-Seeking Alpha from Iraq
Technical analysis is most useful in giving us a visual, quantitative 'snapshot' of market psychology and sentiment; nothing more. Support and resistance levels, along with Fibonacci levels are useful as predictors of 'where' buyers or sellers are most liable to congregate; nothing more.
Price action is driven by basic equity fundamentals, which in turn drive our emotions from fear to greed and vice versa.
In short, the markets don't really give a damn about 'speed bumps' on a chart, and technical analysis without reference to equity market fundamentals neither explains nor predicts.
In short, price action drives the charts; charts do not drive the price action!
On Feb 23 07:36 AM MaineLobster wrote:
> Thanks J Clinton Hill. Nice article. The spiral has begun.
Also in the big picture, nominal GDP is up from 3 to 14 trillion, up+450%. So, if the S&P were to follow GDP, it has to fall another 30% +/-. I know people will say ".... but in 1982 big bad Volcker had evil, high interest rates, but now benign Ben has nice low ZIRP rates....". My response is that this postpones, but does not cancel, reality.
> In short, price action drives the charts; charts do not drive the
> price action!
sure and granted, but what you're looking for is a way to anticipate the "next" price action..
> Price action is driven by basic equity fundamentals, which in turn
> drive our emotions from fear to greed and vice versa.
well, I'd like to be explained how "fundamentals" drive 35% moves over a few days (plenty of examples out there) sometimes in both directions!
IMHO, history doesn't repeat, but rhymes.. and so do chart patterns.. why? because it's us i.e. all of us human beings participating in both making history and trading in the market..
and by your own admission:
> Technical analysis is most useful in giving us a visual, quantitative 'snapshot' of market psychology and sentiment
in other words, what moves the market in the end!
don't disregard this tool, rather learn how to properly use it..
Dow 5,000 this year and Dow 3,000 in 2010 with a possible low at 1,500 before we reach a final bottom.
On Feb 23 08:37 AM prudentinvestor wrote:
> "In the big picture since August 1982, the S&P 500 remains up
> +625.50% despite the current bear market."
>
> Also in the big picture, nominal GDP is up from 3 to 14 trillion,
> up+450%. So, if the S&P were to follow GDP, it has to fall another
> 30% +/-. I know people will say ".... but in 1982 big bad Volcker
> had evil, high interest rates, but now benign Ben has nice low ZIRP
> rates....". My response is that this postpones, but does not cancel,
> reality.
Why don't the "world is doomed" group really put their actions where their mouths are and just leave Earth if its so doomed. Us stiffs out here will continue to muddle our way through.
On Feb 23 11:34 AM mr freddo wrote:
> Thanks for the article. My advice is to put away that Napa Valley
> Merlot and save it for hard times ahead. You may be able to trade
> it for a sack of potatoes in the not too distant future.
in general, i agree with what you are saying but actually believe that there is and should be a healthy interdependent relationship between technical and fundamental analysis.
for the purists out there who are committed exclusively to either discipline, i.e. technical or fundamental analysis, this may sound sacrilegious.
as the saying goes, a picture tells a thousand words and maybe this one is really illustrating the gravity of a situation diluted and polluted by financial media pornography and noise....
believe it or not, i still believe that there are profitable investment opportunities in equities.... however, from the perspective of analyzing the capital markets, determining which asset class represents the best & safest store of value becomes critical if you subscribe to the notion of economic secular trends...
here's an example: in april 2007, i wrote a report which noted GE, which at that time was the nation's 5th largest subprime lender, warned of an incipient bubble in the global credit markets, replaced its entire senior management team at its mortgage unit and reduced this particular unit's workforce by 1000 headcount or 40%.... interestingly enough, the dow jones u.s. real estate index later confirmed this with a break below its 50 month moving average in july 2007 and its 200 month moving average in december 2007.... in a sense, the market was sending a sign-language message on the charts for the deaf and dumb who might have missed this important nugget of fundamental news that was downplayed and/or demoted to obscurity instead of prominent display as a news breaking headline...
i think the market is sending us another signal again: you will note that this is a monthly chart spanning over a 27 year time period and the violation of that 200 month moving average is a flashing red signal... longer term re-allocation of capital throughout the markets tends to precipitate secular and cyclical trends and like the Titanic, these developments cannot just turn on a dime....
now, i've been involved with the markets long enough to witness the occurrence of highly improbable events and unexpected changes in market direction... mr. market is a sadistic bastard and takes great delight in separating the greatest # of people from their capital... technical analysts are not immune to this...
in conclusion, i hope my analysis proves to be wrong for the benefit of us all... i have been wrong before and if i am wrong again, it will not be the last time. but, this is kind of like global warning, the signs are there and you can choose to believe it or not.... a little bit of proactivity never hurt anyone.... chance favors he/she who is most prepared...
still i reiterate that one can still make money under these market conditions, but asset allocation becomes primary while individual stock selection should play an important secondary role...
i appreciate your insight and inspiring me to think more about this....
hope you stay hillbent for the market direction...
On Feb 23 07:08 AM Jim Hawthorne wrote:
> Interesting technical analysis, but it fails to either explain or
> predict anything!
> Technical analysis is most useful in giving us a visual, quantitative
> 'snapshot' of market psychology and sentiment; nothing more. Support
> and resistance levels, along with Fibonacci levels are useful as
> predictors of 'where' buyers or sellers are most liable to congregate;
> nothing more.
> Price action is driven by basic equity fundamentals, which in turn
> drive our emotions from fear to greed and vice versa.
> In short, the markets don't really give a damn about 'speed bumps'
> on a chart, and technical analysis without reference to equity market
> fundamentals neither explains nor predicts.
> In short, price action drives the charts; charts do not drive the
> price action!
like it or not, we are all in this mess together and we will get out of it together.... i'm still buying my bananas while they are green and haven't given up on human progress... this world just keeps getting better and worse at the same time...
cheers....
On Feb 23 11:34 AM mr freddo wrote:
> Thanks for the article. My advice is to put away that Napa Valley
> Merlot and save it for hard times ahead. You may be able to trade
> it for a sack of potatoes in the not too distant future.
On Feb 23 08:54 AM JE wrote:
> I thought that was a very good article. I was enlightened by the
> use of the pivots in relation to the ema's. I would like to read
> more on that if it is in print.
Regards
Thanks for the article. After today's rout, It's good to stand back and see how ugly it can get.
jegan
Point taken! I am a student of technical analysis and have always used it to time entry/exit points after stock 'screening' and 'filtering' via fundamental analysis, and to gain the aforesaid snapshot of market sentiment.
The point I was trying to make (poorly, it appears) is that technical analysis without fundamental analysis is as half-baked and devoid of explanatory and predictive value as fundamental analysis without reference to technical realities!
It takes two to tango!
On Feb 23 10:28 AM dscianni wrote:
> answering Jim Hawthorne ..
Sorry I failed to make myself more clear in my first comment.
As you titled this article, "How Low Can the S&P500 Go?", I was simply trying to make the point that without a fundamental seismic shift, all we could and can expect would be a minor technical 'correction' to the upside; we wouldn't have the answer to how low the S&P500 could really go!
I in no way meant to discredit or de-value the role of technical analysis. Thanks again for the thought-provoking article!
On Feb 23 02:23 PM J Clinton Hill wrote:
> hi jim,
>
> in general, i agree with what you are saying but actually believe
> that there is and should be a healthy interdependent relationship
> between technical and fundamental analysis.
>
> for the purists out there who are committed exclusively to either
> discipline, i.e. technical or fundamental analysis, this may sound
> sacrilegious.
>
> as the saying goes, a picture tells a thousand words and maybe this
> one is really illustrating the gravity of a situation diluted and
> polluted by financial media pornography and noise....
>
> believe it or not, i still believe that there are profitable investment
> opportunities in equities.... however, from the perspective of analyzing
> the capital markets, determining which asset class represents the
> best & safest store of value becomes critical if you subscribe
> to the notion of economic secular trends...
>
> here's an example: in april 2007, i wrote a report which noted GE,
> which at that time was the nation's 5th largest subprime lender,
> warned of an incipient bubble in the global credit markets, replaced
> its entire senior management team at its mortgage unit and reduced
> this particular unit's workforce by 1000 headcount or 40%.... interestingly
> enough, the dow jones u.s. real estate index later confirmed this
> with a break below its 50 month moving average in july 2007 and its
> 200 month moving average in december 2007.... in a sense, the market
> was sending a sign-language message on the charts for the deaf and
> dumb who might have missed this important nugget of fundamental news
> that was downplayed and/or demoted to obscurity instead of prominent
> display as a news breaking headline...
>
> i think the market is sending us another signal again: you will note
> that this is a monthly chart spanning over a 27 year time period
> and the violation of that 200 month moving average is a flashing
> red signal... longer term re-allocation of capital throughout the
> markets tends to precipitate secular and cyclical trends and like
> the Titanic, these developments cannot just turn on a dime....<br/>
>
> now, i've been involved with the markets long enough to witness the
> occurrence of highly improbable events and unexpected changes in
> market direction... mr. market is a sadistic bastard and takes great
> delight in separating the greatest # of people from their capital...
> technical analysts are not immune to this...
>
> in conclusion, i hope my analysis proves to be wrong for the benefit
> of us all... i have been wrong before and if i am wrong again, it
> will not be the last time. but, this is kind of like global warning,
> the signs are there and you can choose to believe it or not.... a
> little bit of proactivity never hurt anyone.... chance favors he/she
> who is most prepared...
>
> still i reiterate that one can still make money under these market
> conditions, but asset allocation becomes primary while individual
> stock selection should play an important secondary role...
>
> i appreciate your insight and inspiring me to think more about this....
>
>
>
> hope you stay hillbent for the market direction...
>
> On Feb 23 07:08 AM Jim Hawthorne wrote:
no problem... i always appreciate constructive dialogue....
just wanted to note that titles for my articles and those of many contributing authors are often revised and sometimes the revisions may not always accurately reflect the spirit of an author's intentions.... not much we can do about that unless the editor is way off the mark, then a request to change title is made.... in this instance here, the original title was "market limbo: how low can we go on the sp-500?" and while the change is minor, the original, i hope, conveys a sense of uncertainty in the downward trend while pointing out potential for more downside risk...
thanks again for the support and feedback....
On Feb 23 04:53 PM Jim Hawthorne wrote:
> Hi, Clinton! I appreciate your response; couldn't agree more!
>
> Sorry I failed to make myself more clear in my first comment. <br/>
>
> As you titled this article, "How Low Can the S&P500 Go?", I was
> simply trying to make the point that without a fundamental seismic
> shift, all we could and can expect would be a minor technical 'correction'
> to the upside; we wouldn't have the answer to how low the S&P500
> could really go!
>
> I in no way meant to discredit or de-value the role of technical
> analysis. Thanks again for the thought-provoking article!
Right now trading volume although off, is still by- historical levels- at unprecedentedly high. Volume is still up probably because someone is still making money, probably a lot. Maybe investors are on the sideline but traders must see money to be made, and they aren't going to stop trading until they conclude that all they are doing is trading each others money back and forth.
At some point I suspect they will throw in the towel and start sidelining their money too. I would expect to see a steady and marked fall in the trading volumes when that happens. I'm thinkin a volume half of present volumes.
What level the market will be at when that happens is anybody's guess but I can't see how we could have a real bottom with as much trading going on as there is now. Looking at other markets outside the U.S. (Europe, Asia) I was struck by the the fall off in trading volumes when markets bottomed. I have not seen that here yet.
Well that's my idea. I'm sure I'm not the first. At least It can't be any further off than the professional pundits.
John