Updated S&P Technical Formation
Throughout the third quarter, the pristine technical formation for the S&P 500® Index (SPX) (Figure 1.1) has most accurately guided investors. In the wake of yesterday’s FOMC statement announcing a third round of QE, the SPX appreciated to its highest close since December 31, 2007 of 1468.36 (Figure 1.2). In fact, the SPX closed yesterday at 1459.99, a mere 7.4% from its October 11, 2007 high print of 1576.09 (Figure 1.3).
The upside is not my concern. The path of least resistance continues to point higher. However, prudence dictates identifying where investors should be alerted for a change in near-term momentum.
In previous blogs, I identified the 1391.74 level as significant. A close below 1391.74 would caution investors that the near-term bullish momentum has been neutralized, and the highly successful “overweight” Q3 positioning should be pared back. I am now raising that level to a close below 1422.38 (Figure 1.4), which is the intraday high on April 2 of this year that provided significant resistance for the SPX throughout Q2.
Additionally, the 200-day moving average (Figure 1.4) continues to rise, currently resting at 1347.39. A sustained sell-off below the 200-day would signal a rather dramatic secular turn for equities, similar to September 2000 and October 2007.
Let me introduce another chart for investors to pay close attention to over the next few weeks. The 10-year U.S. Treasury (Figure 1.5) is challenging the 200-day moving average at 1.83%. Keep in mind, the 200-day moving average has been an excellent indicator to guide fixed income investors over the past 24 months. I mentioned the SPX now rests 7.4% below its 1576.09 all-time high print. I expect a much needed condition to reach that level would be a continued rise in the 10-year yield. Monitoring the 10-year is now once again very relevant to SPX upside potential.
Figure 1.1 SPX Year to Date, inclusive of the 50- and 200-day moving averages
Figure 1.2 SPX 2007-2012
Figure 1.3 SPX 2000-2012
Figure 1.4 SPX Year To Date with new point of reference at 1422.38 annotated
Figure 1.5 US 10-Year Treasury with 200-day moving average highlighted, prior 24 months