In just two weeks, the S&P 500 staged a massive rally from a low of 1074.77 to its recent high of 1239.03. That's a 15.28% move, in just 13 trading days. So we averaged nearly a 1.2% bounce per day, despite four down days and one flat day. That's quite impressive. On Friday, we almost lost 1230 again, but rallied late to close at 1238. So here are five reasons we may have hit a top, and I'll ignore the obvious "we are due for a pullback" one.
Running up into earnings can have negative consequences: When your stock runs up too much into earnings, investors and analysts tend to expect too much, which often leads to disappointment and pullbacks. The market rallied hard into earnings season, and that set up some big names for trouble. IBM (IBM) rallied from under $169 on October 4th to over $190 right before earnings. IBM lost a few points before earnings and another $8 afterwards. The $9 hit from its high so far has cost us about 60 points on the Dow. IBM's report was decent, but it wasn't good enough to sustain the huge run we had. And then there's Apple (AAPL). Apple had a $68 run up from its low on the 4th, around $354. That's almost 20%. A bad earnings report from Apple and we lost $27 of that right away. Apple even closed down $2.44 on Friday, despite the huge rally.
Tech names have struggled at new highs: In addition to the pullbacks from IBM and Apple I mentioned above, a lot of tech names haven't been able to sustain recent or 52-week highs. Google (GOOG), which traded about $605 on a great earnings report last week, never traded during market hours above $600. It's lost ground since then and now stands at $590. It has been stuck between $580 and $590 for the better part of a week. If you look at the range Google has been stuck in, the charts say it could go back down to $550 or even $500. Even Intel (INTC), which had a great report, has lost 1% in the past day compared to a more than 2% rise in the S&P 500. If it can't sustain levels near its 52-week high, we are in trouble.
Good earnings from the banks didn't matter: Let's face it, earnings from the big banks and financials could have been a lot worse. In fact, some of the big names reported decent quarters. Unfortunately, companies like Morgan Stanley (MS), did well due to gains from new accounting policies. Morgan Stanley had a great report. But the euphoria didn't last long. Wednesday morning, it had traded as high as $17.72, but by 11am Thursday morning, it was struggling to hold $16. It got back to $17 by Friday's close but is still 4% off its weekly high. Remember though, it was at $11.58 only two weeks ago, so again, a pullback may have been in the cards. One bad sign from the banks was that JP Morgan (JPM) and Wells Fargo (WFC), two of the largest banks by market cap, seemed to have the worst reports. That will certainly put pressure on the markets if the two biggest market cap financials cannot sustain any rallies.
I don't trust Europe: Can you really blame me? It seems like every time we take one step forward, we take two steps back. I thought that last year at this time everything had been ruled under control, but this year things got worse. The haircut on Greek debt, which seemed to start around 21%, may in fact be 50%, 60%, or larger. How about the EFSF? Can we agree on it before it's too late? Rumors of the size are a dime a dozen, but the size may not matter if there's no agreement. Why don't they agree on something small at first and then try to increase the size? At first, something was expected by this weekend. Now I am hearing next Wednesday. That may even be hopeful. If they don't agree on something soon, the consequences may be disastrous.
Copper didn't fully participate in the rally and has broken down again: Copper rallied a bit off its lows, but was unable to hold them. It touched $3.45 earlier in the week, but now we are below $3.25 again. Copper has always been looked at as an indicator of the global economy, so if it breaks down more, I'll be worried. It had rallied with the markets off the early October low, but has lost half of those gains already. Several times over the past year the move in copper has preceded a move in the US markets, in both directions. If copper falls below $3.00, the next support level could be $2.75. If we hit that, I think the S&P 500 could easily retest its October 4th low. Keep an eye on Freeport McMoran (FCX) as a critical stock to watch for this industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.