Technical Talk On The S&P 500

I thought this morning we’d look at the market from a real simplistic view.  We know since early May (2 months now), the stock market has been churning sideways.  But, when you stand back and look at the charts, theres a few things that stick out.

sp500 6 30 09


The intensity of the rally has slowed quite a bit and you can tell that by the green line I’ve drawn under the S&P 500.  That’s not a moving average but rather just showing you the slope of the rally changing.  In addition, the volume continues to get weaker and weaker (especially going into a holiday weekend).  It almost seems as though the investors that missed the rally are waiting for a pullback and the ones who did participate are now locking in profits or holding pat.  We add to that the head & shoulders pattern developing.  Combine this with tons of indicators I watch on the health of the market, I think we’re going lower.  I think this will be the first real correction we’ve had.  Therefore, I’ve been building a lot of cash and establishing a few short positions.

The first level could be 875-880 on the S&P.  If we break that, we could be looking at the 800 level.  Coincidentally, that would be giving back about 1/2 of the gains since March 9th.  Not out of the question but certainly not something you or I would want to participate in.    So, be cautious.


2 Responses to “Technical Talk On The S&P 500”

  1. 1 James June 30, 2009 at 12:46 pm

    You have been talking about the gap trade, the difference between stock market prices and leading economic indicators. If you are referring to ECRI’s Weekly Leading Index, I personally worry about interpreting that gap as a buying opportunity on a pullback in stock prices. Although my analysis is not complete, what work I have done shows that ECRI’s WLI is correlated with the stock market. If that is true, I would consider them as coincident indicators. If the stock market falls, so will the WLI, and vice versa. They may not fall/rise exactly at the same time. One or the other takes turn leading and it is only a matter of time before the other follows. If this is true, and I do not have the statistical proof just yet, then it would be erroneous to assume that the WLI leads the stock market or vice versa. Have you done any work on this?

    • 2 keggerss July 1, 2009 at 5:14 am

      Very good observation. We do use ECRI’s data in our forecasting. But, that’s just a piece of the puzzle. When you have Dr. Art Laffer & Dr. John Rutledge on your team, that helps alot with economic forecasting. We also use many other indicators and data for economic forecasting.

      But, to get back to ECRI, their leading index is a coincident indicator as far as the stock market goes. But, that leading index number is like a freight train. It doesn’t see saw back and forth. It has a lot of momentum right now and takes a lot to reverse. So, we expect it’ll continue to rise over the next few months and stocks will as well, after a pullback.

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