I remember the day well: May 20, 2008. One session before, the
index tried to rally above its 200-day moving average but failed.
It was already trending lower as the economy slowed and the
mortgage crisis simmered. The first thing I did that morning was
short the S&P 500, and it wound up being one of my best
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Oct. 10.)
At that time, almost everyone was positive. They were heartened
by a rally earlier in the spring and confident that the Federal
Reserve had fixed all the problems. My bearish trade worked
because I ignored the talk and focused on the charts. That's the
same reason that I remain bullish today, though I do believe
there are some modest risks in the near term.
Let's consider that moment in 2008, when the S&P 500 was
trading at roughly the same level as today. Over the preceding 10
months then--starting in August 2007--it had bounced several
times around 1400. But it broke through that support in early
2008 and then hit resistance around the same level. Totally
Today, the opposite appears to be happening. In the last month we
have rallied above that same level and are now consolidating in
the same price range where the market previously broke down. Most
other stocks that have returned to these respective levels on
their charts since the crash have continued to rally, and I
expect the same thing from the S&P 500.
Yes, we know that earnings will be poor, and yes, we know that
the global economy is weak. But the main factor driving this
market over the last five years has been fear of contagion. And
now that central bankers in Beijing, Brussels, Washington, and
even Canberra are printing money, a crisis isn't in the cards.
(Long term, there will be other problems, but those are not yet
Trading in the Australian dollar fund (FXA) also supports the
bullish case. It's been holding support around $102 despite lots
of negativity from China and an unexpected rate cut from the
country's central bank. Economic news from the mainland has been
improving slightly in the last week as Shanghai rebounds.
All of these factors could break down, but they'll give us fair
warning before the selling ensues. Maybe the S&P 500 makes a
lower high or the euro breaks below $1.28. Or maybe real
volatility (not the implied rate of the VIX) starts to rise. I'll
be watching all of those, and you should too.
My conclusion is that we consolidate in this range, followed by
more upside in coming weeks. Some dips down toward 1400 are
possible, so keep some dry powder and don't get frustrated too
quickly. The volatility index has also been climbing, so it makes
sense to sell options--either writing puts in lieu of buying
stock or selling upside calls against long positions.
In the meantime, there are plenty of interesting opportunities
everywhere. This week I asked
for S&P 500 companies that have been trending higher but were
below their 30-day moving averages. Below are some
. (As always, treat them as starting points rather than outright
Edwards Lifesciences (EW):
This maker of heart devices got annihilated on Tuesday after
weakness in Europe caused it to lower revenue guidance. The stock
is now back to its 200-day moving average and a consolidation
level from earlier in the year. Given that the cut was attributed
to cyclical issues rather than something inherent to its
products, investors may now consider this a good entry point.
The online auction site fell after Wal-Mart and American Express
announced a new payment system that could potentially compete
with its PayPal business. But that remains to be seen and the
stock looks interesting, with the current $46 level appearing to
be solid support from August and September.
The world's largest company by market cap continues to look
amazing and is now bouncing above its 100-day moving average. It
may not make new highs right away, but a bounce back toward at
least $675 is in the cards.
It might get a little closer to $14 but looks very interesting
after the recent breakout and pullback.
Sprint Nextel (S):
This stock has been a monster but is now pulling back to its
50-day moving average. Bulls were
in the November 5.50 calls, as well. (Editor's note: See updated
Two others outside the S&P 500 that look interesting include