S&P 2011: The Moment of Truth

|
Includes: AGG, DIA, QQQ, SPY
by: Greg Feirman

In the last six weeks, the S&P has dropped 100 points or about 7%. Also significant is the composition of the decline. Take a look at the chart below showing S&P sector performance since April 30. The market has been led on the downside by energy, industrials, materials and, more recently, financials. In contrast, staples and healthcare - core defensive sectors - have held up nicely. This is a complete reversal of what we saw during the September through April rally (see the chart in "Top Gun FP Client Note: The Limits of a Commodity Led Stock Market," originally sent April 11).

From a technical standpoint, this is still just a correction. However, we are essentially at major support which the market should hold if the bull market is intact. Openheimer's excellent technician Carter Worth did a good job presenting this position Wednesday on Fast Money. Using the 150 DMA, Worth showed that small, mid and large cap stock indexes as well as the CRB commodity index are all right at that support level. Therefore, this would be a logical spot for a bounce.

Worth likes to use the 150 DMA to get ahead of the market since most people use the 200 DMA. But the 200 DMA at 1250 may be the right benchmark to watch at the moment. 1250 also happens to be the low for the year (March 16) and very close to the 2010 year end close (1257). If it fails, anybody who bought stocks this year will be in the red. Many traders will place their stops below that level. 1250 is the line in the sand.

"Monetary policy cannot be a panacea", said Fed Chairman Bernanke Tuesday afternoon. That was the most important sentence from his speech because it means that QE2 will end as scheduled on June 30.

With major indexes at key support and QE2 expiring at the end of the month, the moment of truth for 2011 has arrived.

sp-sector-etfs-since-april-30
(Click to enlarge)