S&P Testing Top of Range at 1370.
Four months after bottoming at 1,075 on 4 Oct 2011, the S&P 500 index has rallied to within 10 points of the top of the current 1,075-1,370 trading range. The stockmarket indices may well rally to probe the 1,370 resistance level on the back of an eventual resolution to the long-running Greek situation or they may rally in anticipation of the ECB’s second three-year LTRO (which takes place on 28th Feb), but either way it is more likely to be a case of “better to travel than to arrive”.
Sensible long-term investors should use the current strength of the markets to top-slice their holdings and bank some profits. Sectors which have performed well in the 27% rally since October include the high-beta banks, insurers and fund managers as well as miners, oils and telecoms (notably BT - its pension fund causes BT to be a high-beta share). These are all candidates for profit-taking (BP may spike higher towards the end of February if it settles out of court before its Macondo oil spill trial begins in New Orleans on 27th Feb 2012).
Whilst my view is the Fed has created the monetary conditions to allow markets to eventually exceed the S&P’s all-time high of 1,576 as the current business cycle expands, nothing is certain in markets and they could quite easily trade back down to test the 1,075 bottom of the current range. e.g. The Iranian nuclear situation causes the oil price to spike sharply higher.
Also bear in mind that big IPOs often take place near market tops (shares are sold under favourable market conditions – for the sellers!). Glencore completed its $10 bln IPO in May 2011 – the same month the S&P topped out at 1,370. Glencore’s shares still languish 20% below their 530 pence IPO price. This time around we have the upcoming Facebook IPO in the States…
The bigger picture roadmap given by the Anatomy of a Secular Bear Market calls for an extended period of range trading whilst the market derates during a secular bear market. The range-trading lasted for several years in the case of the 1966-1982 secular bear market. During that particular secular bear market, each time the stockmarket neared the top of its trading range, taking profits proved to be the correct course of action for long-term investors.
Tags: BP, bt, dow, ECB, Facebook, fed, GLEN, Greece, IPO, Iran, LTRO, Oil, resistance level, S and P, secular bear market, top-slice, trading range
February 22nd, 2012 at 12:31 am
Agreed. Dow 13k and S&P 1370 look firm, although there may be a false breakout after LTRO and first day of March. Oil prices (but more importantly gas prices in the US, which are correlated, but not the same) took the legs out from under the rally last year. Also the weather has been extremely warm this year, so none of the economic numbers can be trusted (the seasonal adjustments are all off). All this needs to play out.
Having said that, this year could be a scorcher, the slower moving averages should hold. 40 election cycles worldwide will provide fiscal stimulus. And all major central banks now printing. Better long to flat than long to short. Buy vol if bearish, it is cheap. PD. Watch Japan, those companies are very cheap on a cash flow basis.