Since January, the S&P 500 futures has obliterated all major resistance numbers. For simplicity's sake, let’s identify those levels as 1250 (starting out with a gap and go on January 3rd), 1300, 1350 and 1400. At this time, the futures index has peaked at 1419.75 (during an overnight session) and has not been able to come within six points of that high ever since. In fact, for the last two days, the index has not been able to sniff the highs of the overnight sessions and has taken out the lows with ease. Quite a reversal in trend since the beginning of the year. The contraction of average daily ranges and choppy meaningless intraday activity may lead to an eventual increase in volatility. And when is volatility at the highest? When the market tanks. But before I get carried away let’s look at the numbers and the nature of the activity in the markets.
For the past month, Premarketinfo.com has preached about the gigantic institutional sell orders resting on the NYSE open book. In stark contrast, to the large orders that were present in the NYSE book during the low’s in October. Although many of these orders have been executed, who has been the buyers? Other institutions that are initiating new positions or High Frequency Traders finally succumbing to buying pressure from the already squeezed shorts. In almost all of these instances when the size is satisfied, the issue will go up a nickel or a dime and then tank as traders rush to exit their longs. On the other hand, there are times when the break out continues for a day or two, but more often than not the stock will slide back down over the course of that time.
From a fundamental perspective, this has not been a broad based rally by any means. It has been the technology sector (I mean AAPL), and as of late the financials have finally joined the party. Several of the S&P 500 Index components have not made new 52 week highs let alone multi-year highs (XOM, GE, JNJ). Even though the financials have rallied, GS, BAC and MS have in no way signaled the dawning of a run-away bull market. Along these lines, the Dow Jones Transportation Index has not even come close to the July 2011 highs.
So what can turn this market south? Of course, an earnings miss from AAPL would get the ball rolling, but that is not even a remote possibility according to Wall Street analysts. According to their estimates, AAPL will not be fully valued until every person in the world (over 12 years of age) has an I-Phone, I-Pad, I-Touch and Apple TV, and any other gadget that I cannot think of that will be invented.
If not AAPL tanking, then how about the financials retreating? Has BAC really improved its earnings and balance sheet to substantiate the doubling of it's stock price? At this time, they have not fully absorbed all the losses from the ill-timed purchase of Countrywide Financial. More importantly, those who find comfort in the recent stress test results should keep in mind that the circumstances that will ignite the next meltdown in the markets, will be unpredictable. Not an event that can be scripted by the Federal Government based on the events from the past. Banks make money by loaning out money and in this current interest rate environment, they would rather buy Treasuries with their cash than assume the risk of making loans.
So let’s put all these hypothetical examples behind us and look at the numbers. With the S&P 500 Index futures 25 points of its recent high, sellers are going to bring their offers down to get out or get short. Thus, 1400 will now become the focus, not 13,000 in the meaningless Dow Jones Average. Expect major resistance at 1400.00 and until there are three closes above 1420.00, 1400 will be a level to remember for the next few months. On the downside, three closes below 1380.00 in the June futures will be confirmation that a top is in for now.
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