Email of the day (2)
Comment of the Day

January 07 2013

Commentary by David Fuller

Email of the day (2)

Topping formation in S&P?
"I hope you and Eoin are well and would like to wish you a very healthy, happy and prosperous new year.

"I have been studying the monthly charts of S&P for some days now and have been wondering if, despite universal calls for a very good 2013 in the region of 1550-1600, whether we are seeing a topping formation similar to what one saw in the years 2000 and 2007. In both those years the markets topped above 1500 for several months before tuning down, just as the market has been closing above 1400 since September 2012 and may do so again this month, which would make it five months in a row.

"The top to bottom percentage increase at the top of the bull run in 2000 was 106%, in 2007 101% and so far in this bull run the increase has been 111%. The current cyclical bull run, in terms of number of months, is already the second longest in history and hence can terminate at any time.

"The fiscal cliff 2 promises to be a battle royale and whichever way we look at it, there is going to be a sizable reduction in spending, which may cause a mild recession in U.S. Also, the Fed seems to be giving us early warning of QE's withdrawal and this is already creating jitters.

"My thesis gets negated, if the S&P goes over 1500 upon conclusion of fiscal cliff 2 and stays there for a couple of months. In that case, we may get a few months of rally and a final top towards the end of this year or early next year in the region of 1500-1600 coinciding with Bernanke's planned exit from the Fed.

"I would be grateful for your comments, particularly w.r.t. the second paragraph of this mail."

David Fuller's view We are well and thanks for an interesting email.

Looking at this monthly chart of the S&P 500 Index, it is right to ask if this cyclical bull trend will end near the upper side of the 12-year range.

The short answer is that I do not know but I have plenty of questions. For instance, in addition to what you mentioned, are we still in the valuation contraction cycle that Eoin and I have referred to on numerous occasions over the last 12 years? If so, that would suggest strong psychological resistance near the S&P's former highs, and these cycles have usually persisted for more than 12 years. Or might QE change the outlook, at least for a while?

With all challenging market questions, I think we do better by distilling them down to a few crucial and commonsense points, the validity of which are still subject to ongoing events.

So, will we have another major event such as the bursting tech bubble in 2000, or the credit crisis implosion as in 2008 during which the US property bubble also burst? I would say no, although a sufficient number of lesser problems, such as you mentioned, could cause a shallower decline. However, the eventual end of QE could be a problem, as I have said before. Or could that be accompanied by a return to stronger global GDP growth, capable of supporting another upside run of consequence before rising interest rates eventually end the cycle?

Again, I do not know, so I am going to watch and listen, rather than guess.

Here is my S&P comment from the chart review section last Friday, and I would keep an eye on 1400 and particularly 1340:

The USA's S&P 500 Index (weekly 10-yr, weekly 5-yr & daily) was less volatile in 2012 than during the two previous years, interestingly. Is this due to more investors returning and increased QE? Whatever, the progression of higher highs and higher reaction lows remains consistent within an ongoing cyclical bull trend. Political concerns remain but the USA's advantage of cheaper oil and gas is likely to be more enduring. A close under 1400 would be a warning and a break beneath 1340 would end the consistency of higher reaction lows and confirm that resistance had been encountered from the 2007 highs.

Lastly, bank and financial shares almost always peak before broader indices when bull markets are ending. I would give S&P Financials the benefit of the doubt, particularly if this Index breaks up out of the current broad range, at least until the sequence of rising lows since October 2011 is eventually broken.

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