These five charts of the S&P 500 from January 1, 1995, come up with a conclusion (not considering any micro or macro fundamentals) that the index is in a middling position - not so hot and not so cold.
We chose 1995 as the beginning point for our study because that was the beginning of the commercial Internet age.
In 1994, the Internet demonstrated the ability to present images, not just text. That catapulted the Internet out of the academic world of text document sharing to the commercial world, leading to all of the amazing technologies we use today. Therefore, we see the post-1994 period as a conceptually different world. That is similar to the common use of the post-World War II period as a different world.
We view the the S&P 500 as being in three practical periods since 1900 (pre-WWII, post WWII / pre-Internet age, Internet age).
The first weekly chart plots linear regression best fit trend lines for various periods, and extends those lines to the current week. They suggest a trend range for the index today between 1080 and 1550. The index closed at 1225 last week.
The trend lines are for (1) the entire period, (2) the 2000 top to 2007 top, (3) the 2002 bottom to 2009 bottom and (4) for the period from the 2007 top to the 2011 top.
- The full period extends to 1330 today
- The 2000 top to 2007 top extends to 1380 today
- The 2002 bottom to 2009 bottom extends to 1550 today
- The 2007 top to 2011 top extends to 1080 today
With the index at 1225 at the end of last week (October 14, 2011), it was in a position 30% of the way from the bottom to the top of the range of trend line extensions.
Click to enlarge charts
This chart simply brackets the trading range the index has been in since the beginning of August (10 weeks). It shows that range to be pretty much in the middle of the price range for the last couple of peak/trough waves, including most of the up/down period of the 2010 correction, and at the beginning of the 2008 crash.
Using retracemennt lines from the 2000 top to the 2009 low, we can see that for the past 10 weeks, the index has been trading between about 50% and 60% retracement - weak but on the positive side of the 50 yard line.
This chart plots the 1-year (blue) and 2-year (gold) moving averages. They both did a nice job of calling the major cycle swings since 1995. According to the two indicators, the index is in some trouble - more cold than hot.
This last chart plots price levels that are 20% below the trailing 1-year (blue) and 2-year (red) high prices. They both also did a pretty good job of calling the major cycle swings. Unlike the moving averages, these trailing indicators suggest that the index is nearly across the line, but not there yet.
We are in the skeptical crowd concerning the next phase. The "maybe yes, maybe no" aspect of the price chart tilts to the negative in our view.
We may be biased by our safety first philosophy, and may still have some recency bias in our view due to the 2008 crash. However, when we add in the macro issues relating to European, Japanese and U.S. debt and China's growing bank loan quality problems, in combination with the micro issues relating to large bank fundamentals in the U.S., we prefer to be more out than in the general stock market at this time.
We don't think the overall index can advance too much unless U.S. banks are seen as reasonably sound and until after the Super Committee, Congress and the president get past all the fiscal deadlines and hurdles set for this fourth quarter, and until the Europeans stop talking about comprehensive plans and implement some comprehensive plans (assuming they do not cause a new crash).
On the periphery of all that is a need to see a quieting of the China bank situation.
Related Securities: SPY, IVV, VFINX
Disclosure: QVM has written far-out-of-the-money PUTs on SPY; and does not have positions in any other mentioned security as of the creation date of this article (October 17, 2011).
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.