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Updated S&P Technical Formation

08/17/2012

Since late July we have highlighted the near-term bullish technical structure of the S&P 500® Index (SPX) (Figure 1.1) from the June 4, 2012 low of 1266.74. A series of five higher lows, followed by subsequent higher highs, is lending itself to a favorable capacity for money managers. Despite some lingering global headwinds, one cannot ignore the technically perfect formation over the past two-and-a-half months. Additionally, as Figure 1.2 below displays, the 50-day moving average of the SPX has now crossed above the 100-day moving average for the first time since June 7, 2012.
 
Investors should always focus first on the risks, not the rewards. Therefore, if a near-term selloff unfolds, we must identify how it will impact the structure of the near-term bullish technical formation. Figure 1.3 highlights in the near term what investors should watch for to determine if the near-term bullish formation is being neutralized.
 
•  Near-term support should exist at July 30, 2012 previous resistance level of 1391.74
•  A close below 1354.65, the fifth in a series of higher lows since June 4, would neutralize the chart formation since June 4, 2012
•  A deeper decline below the 200-day moving average of 1330.19 would be a much more cautionary signal for both the near and medium term
 
OTHER INDICES TO WATCH:
 
Two other indices that investors should keep an eye on: the German DAX (Figure 1.4) which is up 6.52 for the third quarter, and the Technology Select Sector SPDR ETF (XLK) (Figure 1.5), which is up 6.67% for the quarter, and traded to a new high for 2012 this morning. Breakdowns in either chart would be a red flag for investors.
 
TOP 10 HOLDINGS – TECHNOLOGY SELECT SECTOR SPDR ETF (XLK)
1.  AAPL       19.68%
2.  IBM          7.664%
3.  MSFT       7.614%
4.  T              7.223%
5.  GOOG      5.662%
6.  VZ            4.169%
7.  ORCL       4.134%
8.  INTC         3.774%
9.  QCOM      3.570%
10. CSCO      3.367%
 
For those seeking an indicator for further significant upside potential, it comes with the participation of the Russell 2000 Index (Figure 1.6) which is lagging this quarter, up only 1.92%. I suspect the fundamental challenges highlighted by a lackluster 91.2 August reading for the NFIB Small Business Optimism Index (Figure 1.7) is the culprit for small-cap underperformance.
 
 
Figure 1.1 S&P 500 Index (SPX) Near-Term Bullish Formation

Source: Bloomberg
 
Figure 1.2 SPX 50-Day Moving Average Crosses Above the 100-Day Moving Average

Source: Bloomberg
 
Figure 1.3 SPX “Neutralizing Points in a Selloff”

Source: Bloomberg
 
Figure 1.4 German DAX Year to Date

Source: Bloomberg
 
Figure 1.5 XLK Year to Date

Source: Bloomberg
 
Figure 1.6 RTY Russell 2000 Index Year To Date

Source: Bloomberg
 
Figure 1.7 NFIB Small Business Optimism Index 2011 to Present

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.