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Elliot Wave predicts the Dow could go below 1,000 in 2016 (see here). The S&P 500 is in the death cross, the grim name used to describe what happens when the 50-day moving averages cross under the 200-day one, which usually means a sign of more pain to come. How low could S&P 500 go in the short term?

China’s ShangHai Index

The following table shows that since the Great Recession began, the Shanghai Index led the recovery, and then it was the first to correct. The US followed.

Date

ShangHai Index

Pct Change

Date

S&P 500

Pct Change

10/16/2007

6092

-

10/9/2007

1565

-

11/4/2008

1707

-72%

3/9/2009

677

-57%

8/4/2009

3471

103%

4/23/2010

1217

80%

7/5/2010

2364

-32%

7/5/2010

1022

-16%

After the markets peaked in October 2007, Shanghai index was down 72%, then up 103%, then down 32%. S&P 500 followed the same pattern, but with much lower beta. In other words, the Chinese market is 30% more volatile than the US market ( -72% / -57% =1.3; 103% / 80% =1.3). If this pattern holds, S&P 500 could go down 24% from April 23, 2010’s peak (which was 1217), and reaches 917.

Heavy Volume over the Last 10 Weeks

Following are the 10 highest trading volume days since April 23, 2010, with the S&P 500 changed more than 1%. As you can see, the market was down in 8 out of these 10 days. Even on the up-days ( May 10 and June 8), the 10-year-Treasury yield was down too, which means smart money fled to bond markets and drove down the Treasury yield.

Date

Volume

Pct Change

10-Year Treasury Change

05/06/10

10,617,809,600

-3.2%

-0.18

05/07/10

9,472,910,400

-1.5%

-0.04

05/20/10

8,328,569,600

-3.9%

-0.03

04/27/10

7,454,540,000

-2.3%

-0.09

05/10/10

6,893,700,000

4.4%

-0.04

05/04/10

6,594,720,000

-2.4%

-0.04

06/08/10

6,192,750,000

1.1%

-0.01

06/04/10

6,180,580,000

-3.4%

-0.15

05/18/10

6,170,840,000

-1.4%

-0.11

06/29/10

6,136,700,000

-3.1%

-0.02

S&P 500 Earnings

At expected earnings of $88.78 over the next 12 months, currently the S&P 500 is trading at a P/E of 11.5 (see here). From a fundamental point of view, S&P 500 ETFs, such as SPDRs (NYSEARCA:SPY) or iShares S&P 500 Index (NYSEARCA:IVV) are dirt cheap now.

Conclusion

From a technical point of view, the S&P 500 could go as low as 917. If you are trying to time the market, you might want to use short ETFs such as UltraShort S&P500 ProShares (NYSEARCA:SDS) or Short S&P500 ProShares (NYSEARCA:SH) to short the market. However, the market’s temporary dig provides a great opportunity for retail investors who have a long term investment horizon to cumulate your dream stocks from your wish-list. After all, S&P 500’s forward P/E is only 11.5.

Data is from Yahoo Finance and is valid as of July 5, 2010.

Disclosure: Author is long SDS

Source: How Low Could the S&P 500 Go?