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The SPX Crucially Positioned – Skepticism is Rampant



The Crucial SPX Levels to be Watched!

Skepticism in the Stock Market – Action Needed?


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April 02, 2012

Introduction

The “first quarter” was definitely a great historical start for the market in 2012, as the S&P 500 Index (SPX) turned in its best January-March performance since 1998. (To put that in perspective: the last time the SPX fared this well in the first quarter, notorious tech-bubble casualty Pets.com was still five months away from launching.) It's an interesting thing about this bull market, though -- three years and more than 600 SPX points later, retail investors still aren't buying it.

This article looks at three major signs that skepticism is mounting, despite the market's technical feats.

The Earnings from the First-Quarter Earnings May Produce Some Surprises

"….. even though some technical indications are being thrown around as corrective warnings - sell signals, yet with deeper research and practical understanding on these same indicators suggests a pause could be at hand, but not necessarily a correction. Sideways, choppy action within the current uptrend would not be a surprise, as the SPX battles the round-number 1,400 area concurrent with the S&P MidCap 400 Index (MID - 1,000.73) making its second run in as many years at the 1,000 millennium mark. Overall, this appears to be still a favorable environment for the bulls."
- Sell Signals for the Stock Market, March 19, 2012

"Short selling rose at the New York Stock Exchange and Nasdaq Stock Market during the first half of March... the number of short-selling positions at the NYSE not yet closed out, known as short interest, increased 2.05%... On Nasdaq, short interest rose 2.54%... Over the period covered by the latest short-interest report, the Dow Jones Industrial Average rose 300.69 points, or 2.32%. The Nasdaq Composite Index increased 89.48 points, or 3.02%. Marketwide, the short ratio, or the number of days' average volume represented by outstanding short positions, rose to 4.2 days from a revised 3.7 days, at Nasdaq, in late February."
- The Wall Street Journal, March 26, 2012

Two weeks ago, in an article titled “Sell Signals for the Stock Market”, it was pointed out that there are numerous calls for a correction based on varying technical indicators.

With continued research on these indicators -- together with the fact that equity benchmarks, such as the S&P 500 Index (SPX - 1,408.47) and S&P MidCap 400 Index (MID - 994.30), were bumping into the round-number areas – suggests that there was a higher probability of a choppy period, rather than a correction.

Frustrating for both bulls and bears alike is that they have experienced the higher-probability choppy scenario, with the bulls experiencing a jolt once things look good, and the bears getting shocked just when a breakdown appears underway.

30-Minute Chart of SPX since March 16, 2012

040212-SPX



With the market directionless during the past couple of weeks, it is still likely that the next significant move is higher, even with skepticism building although the technical backdrop remains healthy. The skepticism, of course, represents potential future buying power. With respect to the short term, it is impressive to find that the SPX has still experienced only two closes below its 14-day moving average since Dec. 20. This trendline, discussed briefly in the article “Hedge Fund Nervousness May Cause Stocks to Drop!”, came into play during the past three trading days, and enters the week at 1,403.70.

Daily Chart of SPX since December 2011
With 14-Day Moving Average

040212-SPX since Dec 2011



The build-up in skepticism, which was mentioned earlier, is evident on a few fronts, including:

1. The retail investor has been getting increasingly worried since early February, according to the American Association of Individual Investors' (AAII) weekly survey. The skepticism comes amid an advance in the market since this period. The fact that only about four in 10 retail investors think the market is headed higher is quite astounding, given the short-term and intermediate-term trends.

2. Moreover, short interest recently ticked higher, even as the market advanced. The short interest statistics cited in The Wall Street Journal earlier this week came as no big surprise to many. It is usually the professionals who do the bulk of the shorting, and now can be seen increasing nervousness among professional market players through the daily analysis of the options market, where put buying on the CBOE Market Volatility Index (VIX - 15.50) futures has grown rapidly in recent weeks -- probably as hedges to the short positions some fund managers have initiated in recent weeks.

3. The first-quarter earnings season is only a couple of weeks away, and it appears analysts aren't expecting much. Low analyst expectations set the stage for positive surprises, and high expectations sets up an environment ripe for disappointments. Evidence that low expectations for earnings are in force:

”While companies still seem to be trying to operate as leanly as possible, it is going to be harder for them to translate whatever cost-cutting measures are still possible into profits that can surprise analysts and beat the latter's earnings estimates,' Thomson Reuters says. That's the big worry as investors turn their sights to first-quarter earnings season."
The Wall Street Journal, March 30, 2012

"The fourth-quarter company results season was the worst since 2008 in terms of firms beating estimates. That was largely overlooked by a market in the middle of a liquidity surge, but it may come home to roost this quarter."
- Reuters, March 29, 2012

The coincidental impact of the growing wariness among professional market players -- as the SPX challenges 1,400, the MID toys with the 1,000 mark, and the Russell 2000 Index (RUT - 830.30) closes in on all-time highs and former resistance points -- may account for the frustrating situation we have seen in recent weeks. For bulls, the good news is that the market remains on solid footing, and a fair amount of caution is apparent heading into first-quarter earnings season.

A pullback like we saw in late February and early March would push the SPX down to the 1,370 area -- which can be viewed as support, given it is the site of the 40-day moving average and last year's high. Potential resistance is in the 1,450-1,470 zone, the SPX target after the inverse "head and shoulders" breakout above 1,260 and site of the May 2008 peak.

Monthly Chart of RUT since February 2002

040212-RUT since 2002



Daily Chart of SPX since February 2011
With 40-Day Moving Average

SPX since Feb 2011


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