The following (green highlights) is a report that went out to Asbury Research subscribers before the opening bell on Tuesday November 1st. We wrote it in response to the terror that the 32 point, 2.5% collapse in the S&P 500 the day before (Monday, October 31st) had installed in the marketplace, just after the SPX had edged above its 200-day moving average for the first time since the beginning of August.
This is a good example of the kind of research that we produce to try to keep our clients one step ahead of the next move in the market. At the least it should have some educational value for our blog readers, and at best we hope it may encourage some blog readers to consider becoming subscribers.
What We’re Watching Today: Putting This Week’s Decline Into Perspective
Posted on: Tuesday, November 1st, 2011
The meltdown in the US stock market thus far this week has brought some terror back to the marketplace as the VIX has spiked back up above 37.00 on an intraday basis today.
Since we can’t possibly know what the next news flash out of Europe will be, let’s focus on what we do know.
First. the S&P 500 has just risen by +20% between October 4th and 24th, but that big rally only took the market back to breakeven for the year – a place where a lot of investors may be thinking more about just getting even (defensively) rather than making a profit (offensively).
Next, this huge rebound took 9 different global stock indexes that we track (KOSPI, FTSE 100, Bovespa, Sensex, S&P 500, DJIA, RUT, SOX and DJTA) back to their 200-day moving average, which is a widely-watched major trend proxy. After this kind of rally in a little over 3 weeks, a move back to the 200-day MA is probably being considered a Godsend by many managers who were savvy enough to buy the market at or near the recent lows, and is an obvious place to take a few chips off the table — especially with only about 5 trading weeks left in the year.
So, bottom line, regardless of whether there are European debt issues or not, this week’s decline is not illogical or unusual.
The real question is: where does the market need to hold on the downside for the current decline to be considered corrective and temporary, rather than the resumption of the larger May decline?
The daily bar chart of the S&P 500 highlights several important levels:
- 1274: the 200-day moving average (orange)
- 1258: the December 31st 2011 closing price (lime green)
- 1210, 1185 and 1160: the 38.2%, 50.0% and 61.8% retracements of the Oct 4th- 27th advance (teal)
- 1191: the 50-day moving average (blue)
Of these levels, the two most important are the 50-day moving average at 1191 and the 61.8% retracement of the October advance at 1160, the former being a widely-watched minor trend proxy and the latter being the deepest that this week’s decline can extend and still be considered a counter-trend correction within the October 4th advance rather than the resumption of the larger May decline.
Seasonality data show a strong and relatively reliable 54-year historical pattern of performance chasing that takes place during November and December. Especially considering that a lot of managers appear to be under-performing their benchmarks this year, if the October 4th low is indeed the beginning of a sustainable bottom in the US stock market then we would expect to see an aggressive wave of buying come into the S&P 500 at or near 1191 to 1160 support, if not sooner.
On November 25th, we followed up this report with one entitled Downside Target Met In US Stocks (access requires subscription), just as the S&P 500 was testing 1160 support (see the report above), and the US broad market index subsequently rose by 108 points 9% over the next 5 days.
Interested investors can learn more about our investment research, including sample reports and client testimonials, right here on our website, or can get subscription information by calling 224-569-4112.