Monday, November 14, 2011

What next for the S&P?

At the end of August I signed off with the following:
The S&P may yet take another turn lower, particularly when we enter the seasonally weak September/October period. But should it turn into (or get close to doing) a "15%+" decline event from its 200-day MA then it may yet prove to be one of the greatest buying opportunities for the next decade or more.
October did play to seasonal form and the S&P ultimately dropped 14% from its 200-day MA, but will the 1,099 close of October 3rd stand the test of time?

As for the economic climate.  The PIIGS are still rolling around unsupervised in the muck.  New governments are taking shape in Italy and Greece. France and Germany agree to disagree. While the rest of the world look on wondering who will be next (which may require looking in a mirror).  

The "not so extreme" count for the S&P continued to check boxes for September and October 2011 (for a loss greater than 10% from its 200-day MA), but will November break the three month bearish run?

As of the close of November 11th, the S&P was down 0.7% from its 200-day MA, 5.3% above its 50-day MA and 1.6% above its 20-day MA.

There were 9 comparable matches dating back to the start of 1950; the performance over the following 12 months is given for each date:

The most recent match was 2003 which also proved to be one of the most bullish; the S&P finished up 30% by the same date in 2004.  However, there isn't any edge going forward as the plot of the average and 95% confidence intervals shows:

The only statistic of note was the high probability of a lower close the next day; which should mean a loss for the S&P today.

Beyond today there is little to derive; seasonal factors should favour a 'Santa Rally', but by next Spring the S&P may be relatively unchanged.  Bulls may have to wait until the latter part of 2012 before they get the boost they crave.

However, there is one interesting snippet from the data.  Taking the 12-month lower 95% confidence value projection and applying it to November 11th's close, would leave the S&P trading at 1,099 - the swing low of October 2011.  Perhaps the action to watch in 2012 is for a (successful) test of the October 2011 low? This might be the confirmation which attracts money from the sidelines into stocks (from the context of a worst case scenario)

In summary, despite the projection uncertainty, there appears to be more on offer for bulls than bears. Although context should be drawn from a January 2011 projection which currently requires the S&P to rally by over 6% in the space of a couple of months, just to meet the low-end of the 95% confidence interval range!


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