S&P 500 at Key Resistance, Now What?

by Dan March 21, 2011 12:39 pm • Commentary

[private][private]With SPX trading all the way back to a key resistance level (1300), and the VIX out of nosebleed territory (~21), the ten thousand dollar question (please insert your own number here) is….what to do next?

-The SPX peak to trough was down a little more than 7% as of last Wednesday’s intra-day low and has since retraced about half that move at current levels.  Chart below shows this key resistance level.

[caption id="attachment_603" align="aligncenter" width="300" caption="6 month SPX chart showing 1300 resistance level"][/caption]

-Starting to see some things that cause me to be skeptical in the markets ability to get through these levels…….I remain bearish not because I think the markets under-price the geopolitical risk, but largely because of what I think are serious earnings headwinds for US companies as evidenced by NKE‘s results and guidance given last Thurs.


-Lack of follow-through in Banks stocks this morning, which were clearly one of the drivers in Friday’s rally on the heels of the results of stress tests and subsequent guidelines on dividends and buy-backs. (JPM, C, WFC and BAC all down on day).  Market can’t have a sustained rally back to year highs without them.

-Crude oil holding above $100 will be a psychological negative for equities near term.

-On the flip side some things that were troubling me last week, particularly the under-performance in Tech stocks is being reversed today in a big way…..

ALL in ALL this is a tough one, bulls definitely gonna try to retest the highs that we made a few weeks back and at that point your guess is as good as mine…..

– As we get closer to qtr end I will be looking at the sort and magnitude of pre-announcements that we see…..I think companies that try to blame under-performance on Japan should be closely watched by investors.

MY VIEW: not sure it makes a lot of sense in the next couple of weeks trying to make that few % back to the highs.  I am eagerly awaiting Q1 earnings and Q2 guidance to see if the Fed’s recent “mild” optimism, and the market’s resilience is warranted.   We are likely to get a sense for that in the first week in April, if we don’t see any negative pre-announcements the market will likely continue to rally into official start of earnings in mid April…..

-If we rally straight into earnings and continue to ignore the continuing and potential new problems in the Middle East and North Africa, and Oil stays above $100 the next real question is what does $4 gas mean for consumers in the summer driving season?

-I remain cautious and will continue t0 keep the mindset of stock replacement strategies and making directional bets through spreads until earnings and more importantly forward guidance, confirm my beliefs, or prove me wrong (which hasn’t been the first time!)[/private][/private]