Subtitle: Sell Into the Rally?It appears we have reached another critical juncture in the economic crisis.
Yesterday the S&P 500 broke through its 50-day simple moving average but whether it will defy the recent bear market “sell into the rally” trend and head notably higher or collapse to a new strikingly lower low is likely one of the most important Wall Street outcomes in generations.
Although the breaking of the “dot-com” bear market low was an important precedent, it was clearly definable… it was a completely logical level to retest given the assumption that the rally from October 2002 onward was without fundamental merit.
But that level having been breached by a good 20+ points we find ourselves in a bit of a predicament.
What was so fundamental about a level of 752 (741 intraday) on the S&P?
Buyers raced in to scoop up shares on the assumption that they were cheap but who’s to say… there was (and still is) significant turmoil ahead and the S&P 500 P/E ratio was still in the double digits.
More importantly, if 752 was the capitulation low, it seems to have come too easily and its pain was inflicted too briefly for the current economic realities.
For example, Citigroup’s $306 billion backstop bailout was announced after the 752 low… could the market have seen that coming? Could they have priced that in? If so, what did they price in?
We have yet to determine if the backstop will really hold and there is significant evidence to suggest that it won’t.
Also, what of the Feds inability to restore lasting confidence…
The Fed has quickly reached the end of the line in their rate cutting campaign and try as they might to insinuate additional control by suggesting that they will “employ all available tools”, we all know that they are down to creating money and attempting to engineer targeted inflation… hardly a convincing outcome.
Yet we are to believe that these and other significant oncoming traumas (double digit unemployment, inevitable auto industry collapse, 15-20% further decline in home prices, alt-a, jumbo ARM, prime jumbo and prime conforming mortgage default tsunami, record personal and corporate bankruptcies, elevated bank failures) are all priced in at a fundamental base of 752.
I’m skeptical.
My sense is that given the enormity of the economic crisis, a 70-80% peak decline in the S&P 500 with a historical low P/E (single digit) would not be a surprising outcome and further, it would be fitting.
As regular readers know, I have been following along the stock market decline for about a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.
Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.
I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now one.
The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.
The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).
Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.
What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time. Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.
THEN (1998 – 2000 Top)
- A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
- B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
- A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
- B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
- H. It’s over Johnny… OVER! (Uncharted Territory)
