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SPX Needs to Recapture 1390 -- Quickly


If it doesn't, it probably means we have to go through some kind of bottoming process in the 1300-1350 zone.

Yet, last Friday traders seemed confused by the dichotomy of the president's words and after early morning strength sold stocks off after the president spoke. The result left the SPX 2.4% lower for the week and down 3.4% from Election Day. The three worst performing sectors over the past three sessions were energy (-4.64%), financials (-4.12%), and technology (-3.66%).

Regrettably, last week broke the eerily tight correlation between the current path of the SPX, and the historical pattern in a presidential election year, which we have been using for most of 2012. The decline has also has left most of the major indices I monitor below both their 50-day moving averages (DMAs) and their 200-DMAs. Said decline leaves the SPX trading at a P/E ratio of 13.89 based on trailing 12-month earnings and at ~11x 2013's consensus bottom-up estimates.

On the earnings front, it should be noted that as of Friday 59.7% of the companies reporting have beaten their estimates (basis the S&P 1500). This was a better "beat rate" than in the past two reporting seasons. Revenues, on the other hand, have only beaten their estimates by 47.8%; and forward earnings guidance remains negative (-5.2%).

The call for this week: I am still in Europe and unable to really follow the markets closely due to my travel schedule. But there is no way to escape it, the SPX fell through the 1390 level. And if this really is an undercut low like the one we identified on October 4, 2011, the SPX needs to recapture 1390 quickly and then sprint above it. If not, it probably means we have to go through some kind of bottoming process in the 1300 – 1350 zone.

Quite frankly, I don't see how the SPX can travel much below that given President Obama's reelection and with that the guarantee of low interest rates for as far as the eye can see.
No positions in stocks mentioned.
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