The S&P 500 index clears the next hurdle as the index moves above 1304. The chart below was posted on January 20th showing the key support and resistance level of the current trend. At the time the discussion revolved around a break above the 1304 resistance, as large cap stocks were outperforming small caps. Last Friday the index pulled back to test the first level of support at the 1276 level as investors contemplated the impact of Egypt’s political crisis. The effect of the events on the index was short lived as it rebounded in the last two days to clear the 1304 level. Technically this points to a move higher for the broad market index.
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Fundamentally the outlook remains optimistic. Earnings have been above expectations overall for the fourth quarter. 70% of the S&P 500 stocks reporting have beat expectations on earnings and revenue. The current Price-to-Earnings ratio is just over 16 times and the forward P/E is just over 14 times, by historical averages not excessive. The economic data has been steadily improving as seen in the ISM Manufacturing data yesterday hitting 60.8%. That was the 18th consecutive month of improvment. Granted, the economy is not setting records for growth, but it isn’t the dismal numbers we saw in 2009 either. Then why the negative tone from analyst and investors?
The lack of jobs growth and continued decline in the housing market are two reasons that come to mind. However, that has been the condition for the last two years. The rationale most quoted is sustainable growth. Are we doing what it takes to keep the economy growing at a sustainable pace for the broad markets to move higher? There are far smarter economists and analysts than me to make that determination. I have my opinions, but that is exactly what they are, opinions. From my view we have to practice KISS (Keep it Simple …) as the market progresses higher. Attempting to out-think or outsmart the market generally is a losing proposition. However, being prepared and managing the risk of the market is something we can accomplish.
In the vein of keeping it simple, the chart above gives some simple antidotes to managing the risk of the current market environment. First, where are we going? If the break above 1304 holds, the next target would be 1385 on the upside. Thus, if the sustainability of the current trend remains intact we will make progress towards that objective. If however, events take place to derail the sustainability of this progress, we have to consider our exit strategy, or second, where do we place our stops or hedge the risk of the downside?
There are five levels of support outlined on the chart. The first level of support is the 1276 mark which now corresponds to the 30 day moving average and the uptrend line. Thus, from a short term perspective it would be a key level to watch. The green arrows point out the progess of support on the downside. Planning your exit is based on your risk relative to your strategy or how much of your gain or principle are you willing to risk?
Third, what is your plan if you get stopped out or sell the position? Do you want to establish a short position? Do you want to buy the position back based on a defined criteria? Do you want to take the profit and travel for three months? In other words, what is the next step in the process of managing your money?
The S&P 500 index remains in a uptrend, plain and simple. Money flow remains consistent and the outlook leans towards the positive bias. Don’t overthink the process, sometimes simple is better. I know there are many more indicators and measurement tools to manage the process, but the best tool you can use is a defined strategy based on your convictions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
