SPX Heading to 1422
The fuse is burning and we see the SPX decisively breaking out above its April highs of 1420-1422. That potentially brings into view targets above 1500.
To be sure, I am aware of all the bearish arguments swirling down the canyons of Wall Street, but the bears continue to misunderstand that there is not a linear relationship between the fundamentals and the movement of the markets. Manifestly, it takes a massive deflationary shock, like what we experienced in 2008, to cause a waterfall decline in stock prices; and, I just don’t see that on the horizon. Actually, I think the rise in interest rates is more about the improving economic backdrop and the inflation that should accompany it. As the invaluable Bank Credit Analyst organization wrote back in 2007:
“Not any time soon,” says the Bank Credit Analyst and I agree, which is why my mantra has been, “You can get cautious, but do not get bearish!” Importantly, I have likened the March 2009 “low” to the nominal price low of December 1974, which was the “print low” of the 1966 – 1982 wide-swinging, trading range stock market. Further, I have suggested the October 4, 2011 “undercut low” might be the equivalent of the “valuation low” of August 1982 before the 1982 – 2000 secular bull market began. Whether we are now into a new secular bull market is questionable, but secular “bull” markets typically arise when valuations are parsimonious, the economy is a mess, politics are leaning to the left, and individual investors have abandoned stocks. If that sounds familiar, it should for that is precisely the environment we have had for awhile.
Over the longer-term I will let Mr. Market tell us if we are in a secular bull market. As for the here and now, I have been treating the June 4 low as the daily/intermediate-term cycle low.
More recently, I opined that while the S&P 500 (SPX) may pause, or pull back, around the 1400 level, but that any pullback should be shallow with the real bull/bear battle coming at the April highs of 1420-1422. And, that is where we were late last week. Typically the initial assault on a key resistance level like 1420 fails. It tends to take two or three attempts before a key level is surmounted. For example, the Reuters/Jeffries CRB Commodity Index made a reaction high on May 1, 2012 at 307.95.
Subsequently, it has tried to better that high on July 19, August 9, and is currently trying for the third time to close above its May 1 high (see chart below). My sense is this time it makes it because triple tops rarely hold. That view is reinforced by the recent sell-off in the Dollar Index, which closed below its 50-day moving average on Friday. If the US dollar keeps falling it should put the wind at the back of the CRB, as well as gold, which is also trying to break out above a triple top around $1630.
Click to enlarge
The call for this week: The S&P 500 Total Return Index is trying to break out to new all-time highs, as can be seen in the chart. It may also be pointing the way for the S&P 500 because if the SPX can decisively break out above its April highs of 1420 – 1422 it potentially brings into view targets above 1500. And while it is doubtful the SPX can break out above those “highs” on its first try, I think it will indeed eventually break out.
Of course, the grind higher from the June 4 low has been accompanied by total disbelief among individual and professional investors. That is reflected not only in the flow of funds by individual investors out of equity-centric mutual funds, but in the latest Commitment of Traders report that shows the “pros” have been caught heavily on the short side into a rising equity market. So the fuse is burning and I think it is just a matter of time until the SPX travels above 1422.