The S&P 500 is 410 points (33%) below its 200 day moving average - the most oversold it’s been since 1937.
The 200 day moving average generally serves as an indicator of the markets intermediate term trend. When it is rising, the market is generally thought to be in a bull market. When it is falling, the market is generally thought to be in a bear market.
As you can see from the link, it’s pretty rare for the S&P to get more than 20% above or below its 200 DMA. The 200 DMA tends to act as a magnet, smoothing and rationalizing the markets movement in the direction of the overall trend. When it gets too far away from the 200 DMA, it tends to revert back fairly quickly without necesarily changing the overall trend.
At the same time that the S&P is as oversold as its been in 70 years, volatility is starting to subside. Intraday volatility peaked around 90 on October 24th. 10, 20 and 30 day average volatility have all peaked and 50 day average volatility looks like it might have peaked on Friday.
We are way oversold long term. Now, that does not mean run out and blindly get yourself fully invested. We can also stay this was for a very long time. It does mean for the patient investor the are bargains out there..big ones...
The value to using this is to know that the average ROE for the SP500 is ~14% with about 57% of earnings paid out in Dividends and ~43% being reinvested. This provides for a Book Value growth rate of ~6% which has been remarkably consistent and in line with the SP500 earning’s chart showing the remarkable consistency of our economy. Knowledge of this consistency becomes a tool for the value player.
What you do is to convert the P/BV into a ROE to the investor. On 3/6/2009 the P/BV was 1.2 which converts to 14%/1.2 = ~11.7% return for investors who buy the SP500. Then, what must be done is compare this to the Wicksell Rate which is 5.4% today and falling.
"Wicksell Rate" explained here
You can look at this discrepancy as Buffett would and simply say that you are buying an 11.7% yield in a long term 5%-7% SP500 return range. The current SP500 provides sizable upside if inflation remains low. The lower the inflation the higher the SP500 valuation will be in the future during normal times.
If inflation is 1.8% the Wicksell Rate will be ~5% and the SP500 will reach about 20 P/E. If inflation drops to 1% then the Wicksell Rate becomes ~4.2% and the SP500 could reach ~25 P/E. You can also have inflation move in the opposite direction and should it move to 3% the Wicksell Rate will be ~ 6.2% and SP500 would price near ~16 P/E.
What permits an investor to enter the market during times of distress such as these is the knowledge of economic history and the trust that the growth of our economy is inherent within the free nature of our society and will continue in the future.
This is one instance in which knowledgeable investors expect history to repeat itself.
The focus is on the S&P 500, which has traded below its November lows and bottomed out at 667 points on March 6.
By trading below 670, the index reached an intermediate-term downside price objective and set up a daily buy signal. Earlier in the week, that buy signal got triggered, meaning that there is now an 82% chance that the S&P 500 will trace out at least a three-wave Elliott move (possibly increasing to five waves) to the upside.
Although the S&P 500 may move higher over the near-term, keep in mind that the index has risen sharply over the past few weeks and is due for a pullback soon. This would be Wave 2 of a three-wave move.
A normal Fibonacci retracement would come in between 38% and 50% of Wave 1. However, in a very bullish market, it may only pullback 25% to 30% before reversing back up.
Either way, when the current rally runs out of steam (which may have been yesterday), look for the index to see at least four days of price action below the Wave 1 high before new highs are possible.
In Elliot wave terms, if we’re only in a three-wave move up, this would be called an A-B-C rally, which is just a corrective move within the the downtrend.
However, if we’re seeing the start a five-wave rally, the S&P would have to close above the January highs. If you want to play a move at least above the highs of Wave 1, you can buy on the first decent pullback.
The price-to-earnings ratio of the S&P 500 was most inflated in the 1990s, at more than 30 times earnings. The recent slump in the markets has dropped the index P/E to 10.7, as of market close Thursday. Looking for blue chip stocks on the cheap? Now's the time to buy.
Foreword: Too often analysts on a given subject give us their "predictions" or "forecasts" but how often does one truly give a black and white opinion on the matter? Very, very, rarely... My analysis will of course give explanation to my prediction of a 1554 top, but it will also be straight forward, and to the POINT! Where is the market headed? 1554! If that's all your interested in, there's your answer, and you can stop reading. If you would like to know why...READ ON! Thanks and enjoy
The first reason for my near term bullishness on equities is Mutual Fund Cash to Asset Ratio aka (the Fosback Index). This is a piece out of the inventor of the Fosback Index, Norman G. Fosback's, book Stock Market Logic, "An analysis of the last 22 years shows that if no interest return were available on idle cash, the funds would still hold about 3.2% of their assets in the form of cash to meet daily cash flow requirements,..." What that does is give you a base for the index reading. The reading of Mutual Fund Cash to Asset Ratio (MFCAR) is produced by the Investment Company Institute monthly with a 2 month lag. You can find the latest report out at...
The latest report showed that November liquid assets of stock mutual funds in November were at 3.6% vs. 3.8% in October. This is a very bullish sign, and I would be a buyer given that reading, which is reinforced by the recent run the S&P has made over the last 2 months. Why? Because mutual funds are regarded as "smart money" on the street, they also have the MOST money. Yes, mutual funds hold more capital than banks, insurance companies, and everyone else. What that means is when they have extra money to invest, they do! Subsequently, putting money into the market turns the market up, while taking it out turns the market down. Bottom line is, this market, does have room to go higher because there is still money to be put into it. Make sure to monitor the December reading which should come out within the next few days. This reading will be lower than November's, however, the question is how much lower? When you start seeing readings in the range of 2.7%-3% that is a sure sign you are nearing or at a market top. This makes sense right? Money goes in, the market goes up, when the largest pool of money has invested all the money it can, buying stops and the market only has one direction it can move and it is not up...
The second reason is, the Negative Volume Index (NVI) reading on the SPX. What this measures, is the trend of stock prices during periods of declining market volume. The direction the market assumes on days of negative volume changes supposedly reflects accumulation (buying) or distribution (selling) of stock by those who are in the know. What The NVI, is usually seen with, is a 255 EMA. When the NVI crosses above the 255 EMA it is very bullish for stocks, when it crosses below it is consequently, bearish for the market. Table 38 of STOCK MARKET LOGIC shows, NVI and Market Performance from 1941-1975. What it found was when the NVI crossed above the 255 EMA there was a 96% probability of a bull market, when it crossed below there was a 53% probability of a bear market. If you take a look at the NVI since it crossed positive in 09, it has continued on a trajectory further and further away from the 255 EMA. However, just recently in Dec of 2012, it has started moving back towards the 255 EMA, essentially signaling a sign of weakness in the market, which is why I have a short term bullish stance while longer term I do see a significant pullback ahead.
The third, and final point, is courtesy of the timing wizard himself, Thomas R. DeMark. In Mr. DeMark's book, THE NEW SCIENCE OF TECHNICAL ANALYSIS, he explains what he calls retracements. What he found was retracement ratios, using these retracement factors, DeMark accurately predicted among other things, the bottom in the 1987 DJIA crash, as well as the bottom in the 1990 Nikkei crash. I recommend reading his book to find out more information about this, as well many other great tools DeMark has found, that you can use, to help increase your trading skills and knowledge. You might ask, "He called bottoms NOT tops, dummy". While yes, this is true; his retracement factors also work to your advantage the other way, in predicting tops. The two examples I sited, were used in his book, in which he seemed to allude to the fact, that those were among his most analyzed, criticized, and questioned calls, which also happened to be right! I also would like to point out, that both these calls were made on markets that had reached all time highs. Therefore, very few other people even had projections as to where the respective index could fall. Because all time highs were reached, very little could be assumed as to where the support levels could be found at. With that being said, using DeMark's retracement factors, I was able to create retracement levels for the S&P top and they are as follows...
1. 1,015 REACHED
2. 1,229 REACHED
3. 1,554 CLOSING IN
The list does go on, however let's be real, I along with the rest of the world do not think that the S&P will reach above 2,000 on this cycle. I would also like to point out that these levels work similarly (and I use that word lightly) to Moving Averages (MA), in the sense that when one resistance is broken, the next level is the new resistance.
Conclusion: Market tops at or around 1554 on the S&P
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Research is credited to respective parties, I am not trying to portray it as my own.
All companies publicly traded jettisoned higher Tuesday. Regardless of whether this is a bear rally or a bull rally, there is a range of resistance that will prove to be a sweet spot to get out and take a breather, but we aren't there yet.
Take a look at the chart below of the S&P 500 and focus on the bottom on November 20, 2009. When the S&P 500 hit this temporary low it was at a value equal to 60% of its 200 day moving average (DMA). The S&P 500 low on Monday ended similarly at 64% of its 200 DMA.
From The Nov. 20 low the S&P rallied 24% from 752 to a short term peak of 934 on January 6, at which level the index was equal to 75% of the 200 DMA on the day of the bottom (Nov. 20).
Using the 200 DMA and referencing the aforementioned rebound, we can arrive upon a usable level of resistance to which we can ride this rally.
The S&P 500's 200 DMA at the low on Monday was 1058. Using 75% of the 200 DMA at the low as a resistance level, the S&P 500 index at 793 is the level of resistance that would mimic the behavior of the previous rally at the end of 2008. This level will be increasingly difficult to break because it is so near 800, which is an extremely strong psychological level of resistance.
To be more conservative in targeting where to ride the rally, we can use the level on December 16 where the S&P 500 barely surpassed its 50 DMA before finding the peak two weeks later. Here the index was equal to 73% of the 200 DMA at the bottom. If we use this "index level/bottom 200 DMA" fraction as our definition, we could see the resistance level lower at 772.
Finally, it is important to watch the psychologically significant 740 level on the S&P 500. Here the S&P found an intra-day bottom on November 20, and it would be a very bullish sign if the market breaks through. I believe that we can and will break through this level but if you are cautious to put your neck out, this may be where you take some off the table.
Using these three important levels of resistance as a guide, I predict that the S&P 500 will head higher to between 740 and 793. If the S&P 500 reaches 800 in the next 45 days, you should interpret this as a signal to take a substantial share of chips off the table. At this point we will have substantial clarity about the health of banks from the stress tests, and given a strong correction downward we will find new ground to buy.