Indexes Could Test Support Levels Today

By Bryan McCormick

The major indexes touched their support levels yesterday, or came very close to them, before the markets closed off their lows at the end of the session. With the futures down this morning, it appears that support for the Nasdaq 100 and for the S&P 500 will likely be tested again if economic news doesn't change before the open.

One index that did break was the Russell 2000, which closed just a hair below support yesterday. Resistance levels won't change as of yet, but I have notched down the support area. It is now the technically weakest of the indexes.

How the indexes close at end of day will be key. If the bears can break support decisively, we will be out of the latest range. It would be quite a while, however, before a new trend change can be called if one is indeed coming.

Nasdaq 100 (NDX)

First support is at 1619.49. First resistance is now at 1648.77.

For the Nasdaq 100 Index Tracking Stock (QQQQ), first support is at $39.88. First resistance is at $40.60.

S&P 500 (SPX)

First support is now at 1010.48. First resistance is at 1044.31.

For the Standard & Poor's Depository Receipts (SPY), first support is at $101.20. First resistance is at $105.53.

Russell 2000 (RUT)

First support is now at 562.12. First resistance is now at 595.91.

For the iShares Trust Russell 2000 Index Fund (IWM), first support is at $56.27. First resistance is at $59.72.

Comments

[Mad Hedge F...:]

tuio.US stocks are now the most expensive they have been in seven years, and never really got cheap during the March low, just fairly valued. At least I have some good company in my views, which are also shared by David Rosenberg of Gluskin Sheff, the former chief equity strategist at the late Merrill Lynch. The “faith based” rally is now discounting a GDP growth rate of 4.0%, which has a snowball’s chance in Hell of actually occurring. This is up dramatically from the 2.5% growth rate the S&P 500 was discounting when the index was at 667. The best stock market rally since 1933 added an unprecedented eight PE multiple points to stocks, and there is now more risk in the market than the 2007 peak. Underweight portfolio managers and momentum driven day traders are to blame. It’s what happened after the 1933 rally that scares me. Needless to say, stocks offer no value here. You can sign up for David’s well thought out research for free by going to his website at www.gluskinsheff.com/.

Sep 01 11:11 AM

[thiazole:]

If you really believe that stocks are more expensive now than in 2007, it exposes a very serious flaw in your price analysis.


On Sep 01 11:11 AM Mad Hedge Fund Trader wrote:

> US stocks are now the most expensive they have been in seven
> years,

Sep 01 11:45 AM

[Prudent Man...:]

Some "support".

Sep 01 01:21 PM

[willynill:]

I think he means expensive relative to earnings. With the S&P PE now at over 130, I think he is correct.


On Sep 01 11:45 AM thiazole wrote:

> If you really believe that stocks are more expensive now than in
> 2007, it exposes a very serious flaw in your price analysis.

Sep 01 02:11 PM

[thiazole:]

I figured that is what he meant, but it obviously doesn't work, does it. It would have suggested that you miss this huge rally and that it was much better to own before the crash. If you use trailing P/E as an indicator on whether to buy or not, you are using backward looking data to make a purchase that you plan to hold in the future. That explains why it gives the wrong signal. What do I care that GM, Ford, Chrysler, AIG, etc, etc, lost billions in the 4th quarter of 2008? What does that have to do with what they will do in 2010? You do realize that the ridiculous P/E ratio that you quote is a result of what happened in Q4 08 and not what is happening right now, right? Hell, the companies in the S&P right now aren't even the same companies that were in the S&P back then - the worst companies are gone, but they are still being counted in the trailing P/E...


On Sep 01 02:11 PM willynill wrote:

> I think he means expensive relative to earnings. With the S&P
> PE now at over 130, I think he is correct.

Sep 01 03:52 PM

[willynill:]

thiazole, I don't follow your logic on this one. The ridiculous PE is a RESULT of this huge rally. Yes, it is a trailing PE, but it is a measure of the prices now. In order for the PE to get down to, say, 20 (Graham and Dodd would never buy a stock with a PE higher than 20), the earnings would have to increase by a factor of 6 (500% increase!) if the price stays at this level. I'm betting on a big drop in the P, not such a big rise in the E.


On Sep 01 03:52 PM thiazole wrote:

> I figured that is what he meant, but it obviously doesn't work, does
> it. It would have suggested that you miss this huge rally and that
> it was much better to own before the crash. If you use trailing P/E
> as an indicator on whether to buy or not, you are using backward
> looking data to make a purchase that you plan to hold in the future.
> That explains why it gives the wrong signal. What do I care that
> GM, Ford, Chrysler, AIG, etc, etc, lost billions in the 4th quarter
> of 2008? What does that have to do with what they will do in 2010?
> You do realize that the ridiculous P/E ratio that you quote is a
> result of what happened in Q4 08 and not what is happening right
> now, right? Hell, the companies in the S&P right now aren't even
> the same companies that were in the S&P back then - the worst
> companies are gone, but they are still being counted in the trailing
> P/E...

Sep 01 05:51 PM

[David Van K...:]

The high PE right now is a result of BOTH current prices and trailing earnings. That is obvious from the calculation: (current price) divided by (trailing earnings) = PE.

Thiazole is correct that the PE ratio is based on past earnings of stocks that are no longer in the index. S&P has replaced more than 40 companies in the past 12 months. Further , the current price used in the calculation is the current price of the stocks in the index now.

So the PE is a mish-mash. Each investor will need to decide how relevant this number is to forward-looking investment decisions. I am with thiazole, it is not very relevant. There are plenty of other valuation metrics available than this historically aberrational PE.

Sep 01 07:49 PM

[willynill:]

David, I'll double check this, but I think the earnings are the latest 12 month earnings of the stocks currently in the index. Earnings of stocks no longer in the index are not included.


On Sep 01 07:49 PM David Van Knapp wrote:

> The high PE right now is a result of BOTH current prices and trailing
> earnings. That is obvious from the calculation: (current price) divided
> by (trailing earnings) = PE.
>
> Thiazole is correct that the PE ratio is based on past earnings of
> stocks that are no longer in the index. S&P has replaced more
> than 40 companies in the past 12 months. Further , the current price
> used in the calculation is the current price of the stocks in the
> index now.
>
> So the PE is a mish-mash. Each investor will need to decide how relevant
> this number is to forward-looking investment decisions. I am with
> thiazole, it is not very relevant. There are plenty of other valuation
> metrics available than this historically aberrational PE.

Sep 01 10:09 PM

[thiazole:]

If companies that were removed from the index were also removed from the trailing calculation, the P/E number would be getting revised downward dramatically every quarter - think about when GM was dropped in June. What did they lose over the trailing year? I don't even remember, but I think it was $10s of billions, right? The effect that they ALONE had on the P/E ratio was huge - if their earnings were removed when they were removed, I'd have expected the P/E of the index to drop significantly just from that.

Also, think about what you are saying and apply it to individual companies. For the companies that are [or were] losing money, their stock price would have to be negative in order for them to have a useful P/E ratio in this calculation. The companies that are actually making money mostly DO have reasonably low P/E ratios. For many, if you increased their earnings by 6X, their P/E ratios would be less than 2. Is that what you are saying is reasonable? That the companies that are making money need to see their P/E ratios drop to 2 or less to make up for the few that were gushing money 6 months ago? THAT is what doesn't make any sense. And you DO realize that once a year has past from 4th quarter, the trailing P/E will magically drop by leaps and bounds (because the majorly negative quarter will be removed from the calculation). Should we as investors all act like sheep who don't know that this is about to happen and keep adjusting the share prices on a quarter to quarter basis? Really, just think about this. By using trailing P/E as a blunt instrument the way that you are using it, you are really putting yourself at a huge disadvantage to investors who are using dynamic data and who are really thinking about the meaning behind the data like P/E ratios. THIS is why the bears missed the rally. They were so stuck on what happened in Q4-08 that they couldn't see the forest for the trees. And seeing the kind of crazy things that bears have been posting lately, it wouldn't surprise me if when the S&P trailing P/E ratio drops to 20 in Q1-10 and then to 12 in Q2-10 that the bears say it was a conspiracy /manipulation/ accounting, when in reality, it is just the glaring flaw of using trailing P/E ratios for index pricing.


On Sep 01 10:09 PM willynill wrote:

> David, I'll double check this, but I think the earnings are the latest
> 12 month earnings of the stocks currently in the index. Earnings
> of stocks no longer in the index are not included.

Sep 02 10:17 AM