Friday, October 3, 2008

S&P 500 Longer-Term View

First, I couldn't agree more with Bill Luby's recent post regarding seeing what one wants to see in charts (VIX & More - Environmental Factors). That said, we naturally use what we have available to us technically and fundamentally to guide our decision making, however imperfect the data or our interpretation of it. If there is one lesson to all the recent volatility, it's that you just can't become married to your initial conclusions!

After a strong bounce and several day pause after the plan announcement, earlier this week we sliced right through the 50% retracement of the S&P 500's five-year upward move from 2002 through 2007.

Note on the chart above how the S&P 500 remains headed down towards its twenty-year supportive trend line. I am concerned from a fundamental perspective that continued weak economic news and downward revisions to corporate earnings later this month may easily push us to this technical level (say SPX 1,050 or so).

This would represent a further decline of 6% as compared to current levels. Such a fall would also put the index well into the range of ‘typical’ bear market corrections of -30% or more off of prior highs. (Assuming this remains a "normal" event; which I readily concede it may not...) Bracketed commentary aside for the moment, and ever seeking patterns and confluences thereof, this level also falls serendipitously between the lower -62% and -76% Fibonacci levels.

Again, this is an observation and commentary for your consideration, not a prediction. Even if it were, perhaps it wouldn't be much of one seeing as how we are getting daily ranges that are placing us well within imminent reach of this target.

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