Short Takes

In early January we stated it made sense to see how the S&P 500 acted between 1,285 and 1,340 (see 1:47 mark of video). Today we sit at 1,316, which means no resolution has come yet. We will pay attention with an open mind, but it is always good to have a base case laid out for the short-, intermediate-, and long-term. From a short-term perspective:

1. The last push higher in the S&P 500 looked too strong technically for a typical end of a move, which means it would not be surprising to see another push higher, maybe beginning from 1,316ish to 1,293ish.
2. If we push higher, resistance may come in near 1,327, 1,330, and then 1,340.
3. If the move higher is weaker, using indicators such as RSI, it may be followed by more significant downside, possibly below 1,200.
4. Potential areas of support to watch would include 1,285, 1,275, 1,253, 1,210, and 1,192.

A more immediate bullish scenario may follow breaks of 1,330 and 1,343ish. Numerous markets in the United States are looking tired on monthly charts. Thursday’s high was 1,333; so, exercising some patience if we move as high as 1,343 makes good sense.

The leaders in Europe want you to believe that Greece “is a special case” and that no other country will be giving bondholders “haircuts”. The market is not buying it. The graph below, from Zero Hedge, shows five-year Portuguese bonds just hit a new crisis low. Think about that – after all the bailouts, backstops, money printing, unlimited three-year loans, and market intervention from central banks, Portuguese bonds are currently showing the highest probability of default during any other point in the crisis.

The graph above throws some cold water on the face of the “everything is under control in Europe” theory currently touted by Wall Street. The odds are very good the news media will be able to republish many articles recently written about Greece by simply finding “Greece” and replacing it with “Portugal” in their word processor of choice.

The situation was summed up well in the Telegraph (01/26/2012):

A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. “Portugal’s debt is unsustainable. That is the only possible conclusion,” said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. “We won’t know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago.”

From Bloomberg:

“I can understand the strict attitude creditors are taking,” Andreas Plaesier, a Hamburg-based banking analyst at M.M. Warburg, said by phone. “Greece’s behavior could well lead you to believe that this isn’t the last step and that other writedowns could follow. There’s also the concern over whether other countries like Portugal will seek to have their debt load lightened.”

From Bloomberg:

The last time RSI exceeded 70 while the VIX stayed below 20, 11 months ago, the S&P 500 reached a 32-month high before dropping 6.4 percent over the next month, data compiled by Bloomberg show. The VIX is the benchmark gauge of S&P 500 options prices. “We’re definitely in a rare spot,” Josh Dollinger, Chief quantitative and technical strategist at BTIG in New York, said in a telephone interview. “These are extreme readings. They more often than not prove to be exhaustion tops.”

Still have an hour to go, but an S&P close below 1,325 would be best case scenario. A close below 1,331 also aligns with the exhaustion case. In terms of increasing the odds of an intermediate top, a close below 1,315.38 would be a plus. Thus far, we have made no changes today. S&P 500 may still try to make a move back toward 1,327, 1,330, or even 1,340. The recent move was relatively strong, which means even if we are “exhausted”, a weaker move higher (technically) may be required.

We are working on client game plans; comments will be brief. Yesterday’s close above 1,325 put the daily DeMark combo count into a fragile state. There is some hope for it being a good signal if we remain below 1,331.91 on a closing basis. The outcome could be bullish since “bad signals tend to be really bad”, which is reflective of a strong market. Odds are good we will make some moves today, especially with a close above 1,331.91.

Other factors: German bonds weak, U.S. dollar weak, euro strong, Italian yields falling, European stocks firming.

Good news for the exhaustion/reversal case: S&P 500 made a high today that will most likely trigger another monthly DeMark exhaustion signal for the S&P 500; we would need to finish the month above 1,277, which was the November 2011 high. Monthly signals have a good track record; something we will respect.

Bad news for the exhaustion/reversal case: Three “stop-loss” or DeMark risk levels were violated in recent days: (a) 1,324 on a weekly chart, (b) 1,312 on a daily, and (c) 1,325 on a daily. As we noted last night, if the signals are “wrong”, they tend to be “really wrong”, meaning stocks could march higher in a rapid manner. Another close above 1,324/1,325 may prompt us to consider making some changes. We will prepare for more upside as well as more downside.

The Fed opened the door to more “easing” and “accommodative policy” through late 2014, which means they will continue to flood the financial system with printed money and they will continue to grow their balance sheet; both of which tend to be friendly for asset prices.

The link below shows a tired stock market heading into the Fed announcement:

S&P 500 60 Minute Chart - CLICK HERE

Relative to potentially bearish DeMark trend exhaustion signals, the most important S&P 500 level is 1,344. All things being equal, we would prefer to see the S&P 500 remain below 1,343. Similar, but less important levels include 1,326 and 1,313. Several conditions have to be met for a “violation” - it is more than just a close above. For example, the 1,313 level has not been negated yet (three more things need to happen).

Markets can peak on good news - remember when the “breakthrough” euro summit sparked a big rally? It marked an intermediate top. Therefore, an Apple and Fed-induced spike that remains below 1,344, then reverses intraday would be best case scenario for trend exhaustion. It is important to keep in mind if the signals are “wrong”, they tend to be “really wrong”, meaning stocks could march higher in a rapid manner. Thus, the need for an open mind and flexibility.

Typical day: 200,461,000; Today at 3:51: 91,646,000 or just 46% of a typical day’s volume for SPY (S&P 500 ETF). The rally appears to be running out of interested buyers. We did not see enough of what we wanted to see today to make any changes. Exhaustion setups remain in place - nothing has occurred to negate recent comments. Possible we get another push higher. Nothing wrong with being patient.