Lucky 7s for the S&P 500: Could This Be a Near-Term Top?

Wow! What a wild few days it's been since I asked if maybe, possibly, perhaps there's a chance the bottom was in (on 3/8). Since the intra-day low of 666.8 on 3/6, the S&P 500 has rallied 16.7%. I have to share the observation that three "7s", and on St. Patrick's Day no less, sure seems quite fortunate! Dare I call this a very near-term top?

I have been getting a ton of questions from clients and friends regarding my views about the market direction. Is the bottom in? How high can it go?

I shared my views in January and updated them in February regarding both the the timing and the levels of the intermediate and the ultimate bottom I expected to see this year. Initially, I was looking for an interim low in March/April and an ultimate low in the Sept/Oct time-frame. I also indicated that I expected the ultimate bottom to be as low as 625 (625-675). The update confirmed and better justified the level I expect to serve as "the" low.

So, we have bounced hard from a level that was a bit deeper than I would have initially guessed (one that is in the range of what I expect will prove to be the low), and the bounce started slightly earlier than I expected. What now?

1. This isn't an interim low, it is THE low
2. This is an interim low and we will see a test or new lows later this year
3. Don't get fooled again - this is a sell opportunity

So far, I am sticking with my initial forecast (scenario #2), though with humility and a sense of awe, I certainly recognize that the other scenarios could play out as well (60% chance of #2, 30% #3 and 20% #1 is my best guess). I wouldn't be surprised if we pull back over the the next few weeks and call into question whether or not we have a good low in, but we most likely do. In other words, we are supposed to buy dips.

As far as setting an objective, the market could go much higher given how oversold it remains even after the rally. There are lots of things that one can do to estimate, whether it is to find a resistance level on a chart, find some moving average or calculate some retracement percentage. I am setting a Q2 peak objective of 860-920 (click to enlarge):

To put things in perspective, my range would imply just an 11-18% further rally from here. It would imply a total move off the bottom of 29-38%. It would still leave us down as much as 5% YTD or perhaps even up as much as 1% (wouldn't that be wild?). The range I describe existed at times between October and January and served as resistance in February. It would get us towards the declining longer-term moving average. It would represent a rather normal retracement of the massive move we have had since the peak last August, as 880 (my single point peak forecast) represents about a 1/3 retracement of that move.

So, maybe we got some testing and digestion of the big move over the past 7 trading sessions, but I expect that Q2 will prove to be the first up quarter since Q3-2007. I wouldn't get too used to it, but perhaps we can enjoy a rally of another 15% or so from here.

Disclosure: None

Comments

[The Good Ne...:]

Thanks Alan and congrats on your call last week.

It will be interesting to see the same data charted in a week or two. If the past end-of-recession bounces are any indication your move of 29-38% off the bottom may just be the beginning...
mast-economy.blogspot....

Indeed that would be wild!

Mar 18 03:46 AM

[Alan Brochs...:]

Don't get me wrong - it wasn't a "call" as much as a suggestion or a hunch. I definitely got out of the "call" business when it comes to bottoms!

I wouldn't count on much beyond the move I described at this point. I believe we can defer that type of move, if at all, to 2010.

Mar 18 06:08 AM

[PROXIMO:]

Enjoyed the article. Scenario #2 most likely IMO. My guess is after a few weeks upside the market heads south and gets very ugly. Regarding author's reply to GNE: I know of nobody who can consistently correctly gauge market bottoms. Too many variables. Although, on any given market bottom, there will always be someone who has correctly guessed that one. And make no mistake, you will hear about it from them when they do.

Mar 19 12:02 AM

[dramzi:]

Don't get me wrong, I enjoy and respect your analysis, but a 60-30-20 split of probabilities leaves the math a little suspect. On the other hand, given the breathtakingly unimaginable markets at play, a 110% base for outcomes may be realistic.

Mar 19 10:36 AM

[Alan Brochs...:]

Just seeing if you are paying attention! The other day I put "less than" signs instead of "greater than" signs. Thanks for pointing it out. I started at 50/30/20 but increased my base case. If I can have a re-do, I will go with 60/25/15.

Mar 19 02:34 PM

[Ricard:]

I know it's somewhat pointless, but it's always fun to try to pick at a bottom. Congrats on your call.

Mar 19 05:32 PM