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Technical Overview Of S&P 500 Index at Trader’s Narrative

The equity markets were nervous today about the Federal Reserve Chairman’s testimony that the economy’s outlook is “uncertain”. Most indexes sold off more than 1% after gapping up in the morning.

While the effect of Bernanke is the reason most cited for today’s sell off, a technical explanation would be that since topping in April, equities have been in a downtrend. Today’s gap up simply brought price in line with the downtrend line and contained it. On the chart below, this is the downtrend channel (blue lines) with lower lows and lower highs that I’ve been harping on lately:

S&P500 technical overview downtrend Jul 2010

The other interesting aspect of the chart is that basically stock prices has been chopping around for the past 9 months. The red horizontal line is the short term top formed on September 16th 2009 when the S&P 500 reached 1068.76 - this was also a very rare occurrence: a 20% move above the 200 simple moving average.

To be fair, the S&P 500 did eventually climb about 14% higher until April 2010 but it then gave back everything and ended up right back down at the September level.

At the start of the month, before the latest rally, the S&P 500 was 8% below its long term moving average. Right now it is just under it (less than 3%).

Earnings Ignored
For the most part, earnings, that have been very good over all, have been ignored. According to John Butters at Thomson Reuters, “With 100 S&P 500 companies reporting to date, 76% have reported earnings above estimates and 65% have reported revenue above estimates”.

Generally speaking, earnings do not really matter. This is because at different times, each dollar of earnings is worth a different amount to investors. At times, it is worth very little and at other times, the same dollar of earnings is bought at astronomical multiples.

But for what it’s worth, US companies are generally reporting positive earnings with strong balance sheets. As we already discussed, there is a huge pile of cash waiting to be spent.

According to Shiller’s CAPE method of calculating the P/E ratio, investors are paying an estimated $20 for every $1 of earnings. From a historical perspective, this isn’t very “cheap”. Think of it this way, 77% of the time the market has had a lower P/E ratio.

Stock Charts vs. Spreadsheets

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8 Responses to “Technical Overview Of S&P 500 Index”  

  1. 1 Michael

    If I have to go onto every blog and leave a comment regarding this subject, then so be it. The “records amounts of cash on the sidelines” theme is simply NOT CORRECT. So many people do not get this and it is driving me crazy. These records amounts of cash are backed by RECORD AMOUNTS OF DEBT!!!!! Here’s another study that explains this phenomenon. Sure, Apple, Cisco, Google and Mr. Softee, to name a few, have records amounts of cash with virtually no debt but they are the exception, not the rule.

  2. 2 Steve

    Regarding that CAPE schiller number on the P/E ratio and the comment that ‘77% of the time the market has had a lower P/E ratio’. The comment seems to lack context…. Particularly considering that probably 99% of the time investors were earning higher rates of Interest on Government Bonds, and other alternate forms of savings.

  3. 3 Jimmy

    Once the upper trend line is broken higher (looks like it’s today) then it’ll confirm the bottom was in and the stock market is heading higher. whether the economy sucks the stock market doesn’t care…as was the case with its slow uptrend move during the last depression.

  4. 4 Wes

    It looks as though the reverse head and shoulder bottom is in place. Will we break the neckline ? Hmmm

  5. 5 PEJ

    Hi Babak, I think this will be of interest to you:

    Charles Biderman explains why he believes the level of risk in the U.S. stock market is higher now than at any other point in his 40-year career. Traditional investors were not responsible for the rally that has lifted the market cap of all U.S. stocks by about $6 trillion from the March 2009 lows. Neither companies nor retail investors nor hedge funds nor pension funds have been driving the stock market’s gains.

  6. 6 Robert

    PEJ - Thanks and very interesting, but Charles hasn’t called recent turns well.

    The site also looks at the track record of other gurus

  7. 7 Babak

    Biderman was also bullish at the beginning of March and end of March (very close to the April top)

  8. 8 PEJ

    Actually, the main reason I posted the video is because he’s not giving up on his conspiracy theories he made a few months ago and that “kind of” made look like a fool…

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