In my last post, I noted how the S&P formed at triple bottom at 1814. This short term bottom has led us to yesterday’s high at 1885, which also happens to be the 1.27 extension of this last swing. With the S&P high only 12 points away from 1885, the S&P seems to have a shot of taking out the old high.
But, we should ask, what would it take for that to happen? We’ve seen a rotation out of the former market leaders – tech, biotech, financials, etc. – and into the old tech, value and energy sectors. The indices are mixed, with the S&P and the DOW doing well, but the NASDAQ and the Russell indices are weak and below major moving averages. Can the S&P and the DOW go to new highs alone?
I’m not so sure. It’s possible, and much depends on earnings. Let’s consider the bullish possibilities. If earnings for the former leaders turn out to be, on balance, positive, then these sectors might actually join the latest rally. What we would have had is a sell-off ahead of weak expected earnings, which could end if earnings are not a bad as feared. If money flows back into some of these sectors, then we would have the breadth for a broad market run to new highs.
In order for the market to fall from here, earnings would have to indicate that this is as good as it gets. Earnings would have to be weak as expected, but the fears that winter weakness was not due to weather have to be confirmed. A re-awakening of overseas concerns from any number of sources – China, Japan, Ukraine/Crimea – would add to and help catalyze downward momentum.
These markets are tough to trade, because it’s hard to know which way to go. A run to new highs is possible, though I suspect, if that happens, we would hit a new high in May and sell off through the summer. This mostly because I don’t see many catalysts that would push the market higher this summer. I’m sure many are cautious and reluctant to buy at these highs.
Alternatively, as many fear, this could be as far as the market goes in the short term. In that case, we would form the classically bearish head-and-shoulders pattern (the 1897 high would be the head, the market before that would be the left shoulder, and the current market, if it does not exceed 197, would be the right shoulder). The mixed indices are a worry, so they would have to resolve one way or the other eventually.
The longer term investor may not need to do much, because worrying about the next 20-30 points on the S&P will likely not make a major difference. If anything, the longer term investor should think about protecting the portfolio. The short term trader will have to watch indices and earnings carefully. In the next few days, I’m watching the NASDAQ in particular, to see if strength form Facebook and Apple earnings can help push the NASDAQ above its 50-day moving average.