Tuesday, August 3, 2010

SPX Update: August 03, 2010

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What we have here is the SPDR components graphed individually. Take the weighted average and apply the SPX methodology and you get your S&P500.

You can see the price pattern is the same of the SPX except one can see where there is a consolidated trend (AUG 09 to FEB 2010) and we can see which sectors are accounting for the huge spike seen from FEB 2010 to MAY 2010.

I will now argue that from AUG 2009 to JAN 20, 2010 that the trend was a true strong uptrend as all sectors were tightly correlated with strong earnings across the board. At JAN 20, 2010 the correlations broke down as equities tanked to FEB 8, 2010. From here we see a split in three groups of the SPX. Industrials(XLI) and Consumer Discretionary (XLY) sky rocket while Utilities stagnates (XLU). Every other sector trades between XLI/XLY and XLU.

To me such a break down in correlation only shows that the rally to the 1200 ranges in late APRIL were not justifiable as the rest of the sectors lagged the two big leaders (XLI and XLY). By MAY we see a reversion to fundamentals and correlations as Equities correct from the false FEB to May rally. Since MAY we again see a tight correlation amongst all the sectors except that XLI and XLY are still trading significantly above their fellow components (a large spread between XLI/XLY and the other sectors).

As this current drop has failed to produces a strong re-convergence I would say any strong bullish moves are still not justifiable until all sectors re-converge with a high correlation (a.k.a tighter spreads with a high correlation).

XLI and XLY may be in for a good short if I am correct with SPX 1150 serving as good resistance. If the pullback is strong enough to re-coverge all sectors with a strong correlation I will be bullish on the SPX for the rest of the year.


I am bear short term on the SPX (Bear for AUG). Short term sentiment may force prices to 1150 where I will expect resistance, established back from JAN 2010, to hold. If prices do fail strongly, it would complete a bearish head and shoulder patterns giving evidence for a short to the 1000's level (JAN 10 left shoulder, end APRIL Head, AUG/SEPT 2010 Right shoulder?)...


Ride the SPX up to 1050: Todays price action was just a breather from the gap up from two days ago, the next few days price should continue lower levels making a good entry to ride up to my supposed 1150 resistance.

Short at 1150 if conditions are right (multiple confirmation)

Ride the short to low 1000's


The risk is that the SPX doesn't care that important sectors like Utilities have been stagnant for a year and other sectors are lagging consumer discretionary and Industrials. If that is the case sentiment should be able to shoot the SPX straight to 1200 instead. At these levels I would short instead since I doubt sector spreads would have tightend making such a move not justifiable (see analysis above).


Alexander Lê
Managing Partner
Analyze Capital LLC

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