I am not one to predict targets for the equity indices. But reviewing the monthly chart of the S&P 500 below, one can't help but wonder if the index is setting up for an aggressive bull run not unlike that of the early 1990's. I want to draw your attention to the Relative Strength Index (RSI) at the top of the chart below:
Note how "overbought" the index got in 1995, preceding a tripling of the index to its high near 1500 at the height of the Internet bubble in 2000. Since then, despite RSI highs prior to the financial crisis in 2008-2009, the S&P 500's Relative Strength Index has barely touched upon an overbought level in the monthly charts. Given the severity of the 2008-2009 downturn, one would expect new highs to make up lost ground, and then some, as it meanders in "overbought" territory. The daily chart view of the S&P 500, as well as key market indicators that comprise the Baseline Analytics TrendFlex market trend indicators, show a robust bull market but with early signs short-term topping action.
The chart below depicts the daily view of the S&P 500, along with some of our key TrendFlex indicators, such as RSI, Martin Pring's "Known Sure Thing (NYSE:KST)," and sentiment gauges as measured by VIX (the CBOE volatility index) and the CBOE Put-to-Call ratio. As for the S&P 500, its emphatic uptrend is denoted by no less than five touches of its uptrend line from May, 2013.
Near term support of the S&P 500 is at 1850, with the next level of support at the 50-day moving average near 1825. Some noteworthy indicators include KST (bullish since the 1825 level) and neutral-to-slightly negative reading in VIX and Put/Call (low level as such indicate modest complacency, which has been, in the past, a forewarning of a potential setback in the stock market). Other key indicators of our TrendFlex Score include several measure of market breadth, namely the extent to which there is broad participation of stocks in the market uptrend, including more new highs and higher prices coupled with higher volume.
The chart below shows some of these indicators:
It is worth noting that the surge in the Advance-Decline ratio of the New York Stock Exchange (NYSE) since early February, is very similar to the surge experienced in April-May 2013 (see circle). The 2013 surge was quickly followed by a correction in the S&P 500 of about 8% (a similar correction this month would take the S&P 500 to about 1727). The Summation Index, show at the bottom of the chart above, similarly appears to have reached a near-crescendo at its 1050 close on Friday March 7th. Likewise, the NYSI reached 1200 in May 2013, prior to its 8% correction.
As our subscribers are aware, the Baseline Analytics TrendFlex Score measures the RISK of a change to the current trend. Complacency and a "this time is different" attitude can hypnotize traders and investors to join the trend at the very point of an impending reversal. A balanced portfolio, protected with adequate capital preservation, will prepare traders and investors to weather corrections as well as provide the capital necessary to continue to participate in the longer-term uptrend.