Where We Stand: A Look at the S&P 500

Includes: DIA, QQQ, SPY
by: TraderMark

I thought it would be a good time to review the chart of the S&P 500 since we've had so much movement in so little time. I try to touch on this during most of the weekend summaries, but we are blowing through resistance areas so quickly, updates of thoughts are coming fast and furious.

Way back in the day (ok, 3 weeks ago) the world was ending... there were so few buyers and the S&P 500 was in a vortex death spiral. Ah, the good ole days. Readers will remember I was pointing out the "rubber band" effect i.e. the farther from the 200 day moving average we got, the closer we were setting up for a snap back of great magnitude.

Traditionally when the index gets 25% below the 200 day moving average, that is an extreme level, but in the past 1.5 years, we've been breaking traditions left and right. At its worst in November 2008 (after horrific September, October, and most of November), we had crumbled to 38% below the 200 day moving average. So this was an order of magnitude over and above "25%ish"... and apparently the most stretched we had ever been in history for that index.

But not to worry, after a huge rebound and then rally on Obama hope in the first week of January 2009, we went out to best this rubber band stretch. When we fell to about 35%ish away from the 200 day moving average, I started becoming quite constructive on a vicious rally, but in these downturns, if you are even 1-2 days early, you can lose 6-8% in a jiffy. So we fell to 38%.... and then almost to 40% variance; so we slightly exceeded the November 2008 rubber band in March. Yes folks, I said March... the same month we are in now. The same month which is the best monthly return since 1974.

So that was then, the rubber band was let go and woooooosh! we have been flying since. I expected a vicious rally but this has exceeded my expectations in terms of moving up without a break. Post November 2008, we literally gained roughly 20% from the intraday low within 2 sessions and then moved sideways in December before tagging on another move in late December, through the first few days of January 2009. We ended up in about a 27% rally, but 20% of it came immediately. This time, the first two days were not quite the same magnitude, but we have had none of the basing action we saw in December 2008. Most of the action has been straight up.

We had looked for multiple resistance points - all of which have been dealt with easily with a little help from our friends (Uncle Sam)

  • S&P 741: the November 2008 low - dealt with, without even a sneeze once Uncle Ben announced the US would go Banana Republic and literally buy our own debt
  • S&P 780: A series of intraday highs during the February swoon, this initially provided resistance... which was broken after 1 test, but then we fell back last Friday. Problem? Nah - Uncle Geithner came in to hand away US taxpayers' dollars to private firms in exchange for taking almost no risk stakes in toxic assets. The market roared 7% and S&P 780 was but a faint memory.
  • S&P 805: Pre PPIP (Geithner plan) this had provided the ceiling from which the index was rejected, but on the same day we blew through 780 the second time though we dismissed 805.

I said about 10 days ago that eventually I could see this rally taking us to S&P 870 (the actual figure is 875 to 880 in retrospect).... and that if and when we broke S&P 805 you'd actually be able to build a bull case technically. Well we are here... S&P 825 (not on the chart) was the last bit of resistance and after falling back from that level intraday most every day this week, that was defeated by a late day push Thursday.

So a very powerful move, especially in breadth if not in volume. Almost every sector has been taken along, and now we are seeing the speculative animal spirits jump in as gosh awful stocks in the $2-$5 range are rising 50% in a day on (fill in the blank). Now, when I thought we'd have a good chance to hit S&P 870, I thought this would take a lot longer to play out - modeling this more like the late November 2008 to early January 2009 move. History doesn't repeat but it rhymes.... but in this case, it has been an absolutely relentless move. So the nature of the move is different than I thought after the first jump, but then again, I did not plan on quantitative easing by the Federal Reserve or such a luxurious tax payer giveaway by the US Treasury.

So that's where we stand now - you'd think we'd have some back and filling but we've been thinking that at all these technical levels along the way, and each time we try another government induced goosing is announced. The way I play this is to keep moving up the "floor" on changing from "Kool Aid bull" back to bear; it was once S&P 741, then it went up to S&P 780, then S&P 805, and now S&P 825. That doesn't mean if we fall back to S&P 805, it's time to turn bearish again, but now we have multiple levels of "support" that we can assess how the market reacts when/if we are ever allowed to go down again.

Between S&P 805 and 875 you can see a 5 week basing period in January to early February (we were actually doing more falling at that time, with intermittent rallies), and one would estimate we'd do a similar action now but in reverse (gaining with intermittent drops). I will say this has been a very technically "textbook" rally, each time we leg up through a resistance area - bulls are reassured and a flood of orders come in from the supercomputers across Wall Street, providing rocket fuel for another leg up. If bulls become even more comfortable, we can expect a lot more speculative action in the low price stock arena, and reports of stocks moving 40,50% in a day based on... nothing. Heck, if things really get crazy even commercial real estate stocks could begin to explode higher.

Fundamentals? Price to earnings ratios? (or as Obama calls them Profits to Earnings ratios) I'll spare you - it's all about momentum, sentiment and charts. (oh yes, hope too) Fundamental investors have been summarily destroyed over the past 2 years, and the technicians have taken the mantle. We're trading textbook to their world and their toolbox, while fundamental investors are trying to explain "so and so" reason is the cause of these moves. Not buying it... have both toolkits on your belt and respect the dominant one.

This type of action will be setting us up for a very interesting employment report next Friday as well as earnings season that is to follow. I'll have more on this - along with the real sector (not financials, not technology) which has been the "go to man" on both the downside and now the upside - in the weekly summary out Sunday.

By the way, the 200 day moving average is now down to S&P 1020 (stockcharts data say 982, but the charting I use is 1020 so I'm going with that), so the index is now only 18% below...versus almost 40% a few weeks ago - just like that.