Short Takes

As we noted in Tuesday’s video, the S&P 500 did get another push higher this week. We closed right in line with the 1,343 number. DeMark aggressive sequential daily for S&P 500 moved to a 9-13 “exhaustion” count as of today’s close. SPY volume traded roughly 27% below a typical day, meaning the conviction behind today’s move was weak. Table still set for next week - we will see what Monday brings.

Based on traditional technical analysis, the market is increasingly looking more like a bull market. Daily, weekly, and monthly DeMark counts tell us to be careful over the next few weeks. A close above 1,343 would add to the bullish evidence. Failure to close above 1,343 leaves a crack in the bearish door. Using the recycled daily DeMark count of the S&P 500 as a guide, the market could push higher at least until February 9. If gains hold up today, we may take a position on the long side of the market. Based on action above or below 1,343, we can make adjustments in either a bullish or bearish direction. We have been waiting for some resolution below 1,343; we may get in the next week to ten days. Monday’s video provides additional detail on the bull and bear cases. We still prefer Germany to the U.S. on a valuation and technical basis.

We still have no resolution (bullish or bearish) relative to the S&P 500 below 1,343. The most recent push higher in the S&P 500 was relatively strong with daily RSI moving above 70. The 2011 chart below shows we may need a weak bounce/push higher sometime in the coming days if stocks are to move significantly lower. Notice the low levels of RSI (top) and MACD Histogram (blue bars) when the S&P 500 tried to recover from early weakness in a reversal pattern.

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.

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.”

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

S&P 500 60 Minute Chart - CLICK HERE

Updated/Corrected Levels as of 2:00 p.m.:

We have Apple’s earnings after the close and a Fed statement tomorrow, which may lead to some buying (one more push higher?). If the following levels are violated on a closing basis today, it would increase the odds of reversals: S&P 500 1,308, SPY 130.77, IWV 77.41, IYT 92.99, IJH 92.22, DVY 54.33, FDN 33.40, IVE 60.79, IVW 69.65, QQQ 59.49, OEF 59.32, and AAPL 429.11. We have five very specific S&P 500 triggers we are monitoring as well; as of 12:30 p.m. ET only one of the five has been tripped.

The chart below shows the CBOE Put/Call ratio. The current reading on the chart prompted Tom Bowley to title his recent analysis Complacency Screams Get Out Short-Term. In terms of where the markets currently sit, the key may be “Short-Term”. We agree 100% that typically the levels shown in the chart below align with reversals in stock prices. However, the exception to the rule can be at the beginning of a new bull market (March 2009). While the high levels of complacency in March 2009 did not derail the new bull market, they were followed by two sharp, but brief, pullbacks of 4.35% and 6.36%.

In the chart below, stock market peaks are noted via the blue vertical bars. Compare the current readings of the indicators (PPO in middle & $CPCE at bottom) with recent market peaks (top of chart). Bottom line: Current levels of complacency align with a pullback in stocks of some kind (short or longer-term).

Our read on DeMark counts remains unchanged. Everything is in place…..except for the most important thing….a reversal. We could still see some upside based on the counts and associated risk levels. DeMark is one of many tools we use. Even if the signal turns out to be a “bad” signal, it will help confirm the potential for more upside. As we mentioned early in the year, it is prudent to see how this plays out before making any significant chess moves for 2012 (bearish or bullish).

On the fundamental front, actual earnings vs. estimated earnings so far have been the worst in ten years. This means numerous E.P.S. forecasts and market forecasts need to be revised to the downside. The Fed signaled today via the WSJ that no QE announcement is likely next week, which could also be a catalyst for a pullback.

We would still prefer to see the S&P 500 make a higher high relative to Thursday’s close. Our comments from December 10 still apply:

The green arrows in the chart below show instances when the blue trendlines acted as both support and resistance. Those lines intersect near the orange arrow and represent possible resistance for stocks. If the S&P 500 can push higher, the next points of possible resistance come in near 1,305, 1,313, 1,326, 1,334, and 1,343.

Below is an updated version of the chart shown on December 10: