Saturday, April 4, 2009

S&P500 Forecast 4/4/09

Here is an interesting chart of S&P500 Down Swings from the early beginnings of these "crises" taken from the chartstore ( I swear Rizholtz blog is just trying getting people to buy stuff, not much more different than cnbc or any other big media these days; either way I will observe the data as given)



My Main Analysis will revolve around a S&P500 2009 to date chart:



This chart will be put in the bigger context of a chart that goes all the way back to the early write downs of "subprime."




Firstly let me state the goal of this entry:

Despite some horrid calls I have made in equities (read some old entries back from 06/07) I will be considering where the S&P500 will be heading taking into consideration this bear market rally we experienced over the past 4 weeks. The idea is to use more sentiment to find direct for the upcoming week and maybe examining performance for the second quarter as well. Same rules apply for my currency trades first quarter (In regards to quarter performance, short term is price movements within a month, and long term will be the whole quarter into the 3rd quarter; otherwise short term will be what happens in the next few weeks).

Once again Skip Summary to gauge current performance if you don't care to see the supporting evidence:


As long sticks out to me as to why I should be a bear or a bull I will consider both arguments and see the better of the two.

Bearish Argument:

Technical View:

Looking on the Max chart of the S&P (not shown above) there is not a single up quarter from July 2, 2007 till present day, though second quarter 2009 holds promise for its current trend. One part of the bearish argument lies in the fact that though the second quarter is an up quarter for the first month, it has yet to pierce many resistance levels; February 2009 level of around 850-860, and January 2009 levels of 930 or so. If you even want to be more bearish, you can talk about resistance levels of 1000 from 4th quarter 2008. I would have to say if prices cannot pierce 860 levels I will maintain a bearish stance overall for Quarter 2(subject to changes of course).

Another interesting piece of evidence for a continued bearish trend is looking at the RSI. Looking at the two largest crashes for the S&P500 the 2000 crash and the (current crash we are in), when in down trend the RSI has not hit higher than the 66. Right now the RSI is hovering at 61 (I will add in sentiment is questionable which I will discuss later). However if RSI surpasses 66, perhaps this may lend more evidence to a bullish trend development.

I would also point out chart 1: I would have been bullish after december 2008, however the latest down swing already is lower than the second to last one, and the current upswing (the 4 week bear market rally) has not reached same levels of the second to last upswing.

Fundamental View:

I guess it would be good to consider key sectors in the S&P500 which is where I will be lacking expertise, though lets see what evidence I can piece together. Overall considering the economic situation across the world, I would say lending is a key problem for the financial sector of the S&P500, though banks have recently headlined of bringing in profits, and there have been headlines in the etf and hedgefund industry of fresh capital, Overall lending has not changed. I recently spoke to my mom who does retail banking in Wachovia, she hasn't made a loan in 7 months! We are talking about middle class America in average town from average Joes. This definitely should be troubling, as this has greater implications to growth as firms will not be able to get money to grow business.

Where is the support for this? Anyone see the recent job's report? Not so beautiful (some how markets discounted that horrible economic report - talk about a blow for you fundamentalists).

At this point it probably be good to look at key sectors that are prone to more weakness, or looking at sectors that may spur continued growth due to its potential to get capital despite market/economic conditions. I will leave this out for now due to time constraints and return to it if possible...


At this point the main question is if this 4 week bull rally indicates a trend change or a bottoming of prices, or is it just a temporary whipsaw. It is in this context that I will discuss the possibility of a bullish trend.


Firstly I decided to look for support to see if this trend could be sustained. Unfortunately but most interesting support can not be found within the time period of this crises (cannot see it in chart 3). I believed there to be shared true support at 650. What I mean by this is that after the crash 2000, prices bounced off around 830, however below 830 probably exist different levels of psychological support. The main one I am looking to right now is 650. If prices break below 600 I will be be a very big bear and expect prices to fall to 450. However, granted that prices are supported at 650, this would be good evidence for this trend to continue.

More evidence that could help a bullish trend would be the RSI if it could pierce 66 (see RSI argument for bears).

In addition, taking a look at chart 3, considering the large amounts of volume for the second quarter 2009 is support for a continued bullish trend. During 2008 the high amounts of volumes on down days have not been surpassed or matched, however the volume of the recent bear market rally seems to be on par of volume seen in September and October.


Considering the economic situation, I see very little support. As stated before probably a bottom up approach (sector by sector) analysis would be appropriate here.


I will have to say that overall the S&P500 is still in overall trend, though the bullish argument may leave room for possible change in trend.


Let me look at Chart 2 now examining sentiment within the context of chart 1 and 3:

Looking at Chart 2: It is very clear from March 1 we see the start of the bear market rally. For the first 3 weeks we see that each end of the week ended on as a down day. For those who are into reading candles, there are very clear signs indicating this. The beginning of the rally saw a high upper shadow, which is indicative of a bullish fighting hard that day despite it being a down date. What ensued was bullish higher highs and higher lows for 4 straight weeks.

An interesting note I would like thing i noticed at the end of the 4th week was that it wasn't a down date. Looking at the candle it had a long lower shadow and no upper shadow, this maybe indicating sentiment is bearish for the upcoming week. Though one can look to futures markets to confirm this, but one can look at CBOE sentiment indicators such as index put/call ratios. on the S&P500, it seems that the first week showed somewhat bearish sentiment, that went quite bullish as the rally continued, returned back to more bearish. There is a significant turn from April 2 to April 3rd from bullish to bearish. A similar move is seen in reverse at the start of the rally from bearish to bullish.


Based in the larger context of an overall down trend, added with many people who will be taking covering gains, along with a change in sentiment, I expect this the 5th week of this rally to pause or go in reverse.

So if sentiment does really go in reverse this week, If support doesn't hold at 830, I would expect prices to go to 810.

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