S&P 500 May Be Headed to 1,256

Friday’s better than expected employment report aligns well with the market’s post-QE2 interpretation the economy is in a little better shape than most believe. Now that mid-terms, QE2, and the employment report are in the rearview mirror, it is a good time to catch our breath and discern what may be in store over the next week or two.

Market participants and their trading algorithms tend to have long memories. We are not big fans of making decisions based exclusively on forecasts, but it always pays to understand where markets may run into some short-to-intermediate-term turbulence. If we can hold onto Thursday’s gains, then stocks and risk assets may have some more room to run. The blue, orange, green, and black lines below represent past areas of importance to both buyers and sellers. A convergence of these lines seems to come into play near 1,256 on the S&P 500 (SPY).

S&P 500 - Next Stop 1,256

The chart above is one of many tools we use to better understand the market’s risk-reward profile. We will be watching sentiment, the CCM Bull Market Sustainability Index (BMSI), and the CCM 80-20 Correction Index, along with other tools, to monitor the health of the market’s current bullish stance. It may turn out that (a) we never get to 1,256 on this leg up, or (b) 1,256 does not look as important as we approach it based on readings in other areas. Currently, we do know it makes sense to pay attention near 1,256.

The AAII Investor Sentiment Survey showed a drop in the percentage of bulls and a rise in the percentage of bears this week. The percentage of bears increased from 21.6% of those surveyed to 29.8%, which is an increase of 38% week-to-week. Sentiment is a contrary indicator; the more bullish the average investor becomes, the higher the odds a correction is around the corner. Sentiment seemed to confirm yesterday’s break to the upside, but only if we can hold yesterday’s gain by the close on Friday.

Traders, money managers, and active investors should make a point to get away from the market for a few hours this weekend. QE2 and election burnout is probably common among those of us who live very close to the markets. Recharging the batteries is productive in the long-run – go get some sleep and fresh air.

2011 Stock Market Outlook - NEW


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