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Checking the Technicals

11/19/2012

The S&P 500® Index (SPX) declined 1.45% last week, placing its current 2012 year-to-date performance at +8.13%. The SPX has incurred a fourth quarter decline of 5.61%. We have long suggested to utilize a sustained sell-off below 1422.38 as the catalyst to reduce risk asset holdings down from overweight. The sustained break below 1422.38 was confirmed on Tuesday, October 23. Since then the market has continued to correct lower, suffering a sustained break below the 200-day moving average at 1380.71 on the Thursday after the U.S. presidential election.
 
Investors, rightly so, are now focused on the potential depth of the decline. I have received many tweets over the past few days, asking if I expect unchanged for 2012 1257.60 to be challenged. Let me be clear, I do not.
 
I suspect last Friday’s reversal is a good first step toward the SPX finding a trough for the current correction. Technically, the SPX held support at its 62% retracement level (June 4 low at 1266.74 to September 14 high at 1474.51) at 1345.69. However, it is imperative that the SPX extend Friday’s late strength both on Monday and Tuesday. The time is now, so to speak. By Tuesday afternoon, should the SPX (Figure 1.1) still rest uncomfortably at Friday’s 1359.88 close, I suspect a deeper decline for the SPX below 1340-1345, towards 1300, may unfold.
 
Globally, please pay attention to the German DAX (Figure 1.2); we have highlighted its importance in each of the past two quarterly commentaries.  Year to date, the DAX is +17.84% and for Q4 it is -3.68%. Unlike the SPX, a sustained break below the supportive 200-day moving average has NOT occurred. For the DAX, the 200-day moving average rests 1.8% lower than Friday’s 6950.53 closing price. A sustained break below there would be problematic for global markets to arrest the current decline. 
 
Finally, let me answer another question being tossed my way recently. Yes, more than likely, the SPX high for 2012 of 1474.51 from September 14 is in place.
 
Even if the SPX can find its trough in the near term, overall I view the status quo November 6 election result as the bond market’s friend.
 
Figure 1.1 S&P 500 Index (SPX) Year to Date

Source: Bloomberg
 
Figure 1.2 German DAX Year to Date

Source: Bloomberg

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