In World War II, the Maginot Line referred to a line of concrete fortifications, tank obstacles, artillery stations, machine gun posts, and other defenses, that France constructed along its borders with Germany and Italy. These various structures created a principal line of resistance, which was hoped to be impenetrable from a German attack. The Maginot Line was breached from the north and France was seized.
The stock market now has its own Maginot Line, that being 1040 on the S&P 500. That magic number has withheld four assaults on it since February of this year. It is thought that if 1040 is breached to the downside a high number of sell orders will tick off. Bulls would sell their long positions and bears would short the market, creating a cascade effect on prices.
The market is extremely oversold, but there appears to be a dearth of buyers, as bulls have had back to back positive days only once since April 29th. The high amount of intra week volatility is a warning sign that more trouble could be coming. Normal markets don’t have swings of 8%, 5%, and 4% in consecutive weeks like we just experienced the last three weeks.
The NASDAQ has been the market leader since the run up started in March of 2009. It has now been down four days in a row and closed today at its lowest level since February 10th. What happens next is very important for the markets near term direction. Are we going to have a summer rally? Or, do we fall below these key support levels (NASDAQ 2139) and have another 10% or more decline from here.
It’s been a painful five weeks of trading, with the major market averages down 13 -15% from their late April highs. Historical evidence points for more pain to come. In the past 70 years there have been 21 times when markets fell this far, this fast. 85% of the time (18 of 21 instances) the market continued to decline. On average the markets sold off an additional 10% after that first leg down!
In my previous writings, I have called for a market decline to 875 – 950 on the S&P 500. Should the Maginot Line be breached be prepared for a quick sell off to those levels. The markets, like France will surrender. Many pundits are calling for new highs for the market. Many are looking at recent, but old data and projecting that information forward. The market is forward looking, and seems to be indicating something very different for the markets and the economy. The battle lines are drawn; watch closely because the money you save may be your own!
Disclosure: Author owns GLD, SLV, GDX and GAZ.