S&P 500 Targets For Next Market Correction
As I wrote a few weeks ago, I expected another leg down in equity prices in as little as the next two weeks. Well, that time is upon us. If we do get another leg down, we'll again hear many telling us it is a bottom and how great of an opportunity it will be to buy stocks. More of the same chatter from those telling us the market was cheap at near 1600 on the S&P. And even cheaper here. That banks were a great dividend paying investment this cycle. That utilities are defensive. That small caps represent great value. That banks were a great buy when they were down 10%, 20%, 30%, 40%, 50%, etc. As I've said repeatedly, this will likely go down as the largest global bubble in history and this is an ungodly expensive market.
Maybe we'll finally get a bottom worth trading if we get another down draft but we shall have to see. If a downdraft does come, I suspect we will end up in the 1100-1150 range on the S&P. There are three main reasons I believe we are headed to this level. First is that it is a 61% retracement of this bull market's gains. In other words, this level will have erased 61% of the gains had since the bottom in 2003 as show by the horizontal line in the chart below. That is famous conjugate of the Golden Ratio made so famous by Fibonacci traders. Second, is because the economic top in the equity market was very likely May of 2006 and because of that fact there is little price support above 1150. (More on this in another post.) And, third, it is where the largest supporting volume resides over the last eleven years as show on the chart below. This chart shows volume at the varying price levels over the last fifteen years. We discussed this concept back in 2006 in posts on 'volume at price'. You can search the site with Google for these posts using the box to the right side of the blog if you are interested in more information.
Ultimately, where do I believe we are headed before this bear market is complete? That's an interesting question. And, the answer is far from a scientific fact. The messes created beyond the May 2006 top add significantly to my concern and, therefore, the depth of any correction. I would say we have a reasonable chance at the 1994 pivot low shown on the chart. I'm not stating that is my position but that it would be within the realm of possibility. It would also support the position that I have repeatedly made that Wall Street, as an industry, is putting in a major top.
From much of my work, 400-450 would represent reasonable equity valuations for a capitulation low. Another option would be a retest of the 2003 lows. Thinking out loud, that may be less of a possibility given the time factor associated with the additional move from what I believe was the economic peak in May of 2006 to the ultimate S&P peak in September of 2007. That move came because of the size of the global imbalances that will ultimately lead to further downward pressure in a correction. Of course, no one on Wall Street is calling for anything similar. In fact, most are calling for a pick up in the market and the economy in the second half of the year. That's just a few months away. I see nothing to support this perspective other than wishful thinking. I wish for that too but the odds are extremely low at this point in time. So, that being the case, I could envision an upcoming selloff followed by a failed rally by the bottom pickers into the second half of this year to fulfill the general belief that the economy will pick back up. But, that's simply based on anticipated market behavior rather than anything else.
In closing, isn't it interesting that 400-450 on the S&P is where we find the strongest volume support over the last fifteen years? Even with an explosion of trading volume in this cycle. Let's see if prices gravitate towards volume.
Maybe we'll finally get a bottom worth trading if we get another down draft but we shall have to see. If a downdraft does come, I suspect we will end up in the 1100-1150 range on the S&P. There are three main reasons I believe we are headed to this level. First is that it is a 61% retracement of this bull market's gains. In other words, this level will have erased 61% of the gains had since the bottom in 2003 as show by the horizontal line in the chart below. That is famous conjugate of the Golden Ratio made so famous by Fibonacci traders. Second, is because the economic top in the equity market was very likely May of 2006 and because of that fact there is little price support above 1150. (More on this in another post.) And, third, it is where the largest supporting volume resides over the last eleven years as show on the chart below. This chart shows volume at the varying price levels over the last fifteen years. We discussed this concept back in 2006 in posts on 'volume at price'. You can search the site with Google for these posts using the box to the right side of the blog if you are interested in more information.
Ultimately, where do I believe we are headed before this bear market is complete? That's an interesting question. And, the answer is far from a scientific fact. The messes created beyond the May 2006 top add significantly to my concern and, therefore, the depth of any correction. I would say we have a reasonable chance at the 1994 pivot low shown on the chart. I'm not stating that is my position but that it would be within the realm of possibility. It would also support the position that I have repeatedly made that Wall Street, as an industry, is putting in a major top.
From much of my work, 400-450 would represent reasonable equity valuations for a capitulation low. Another option would be a retest of the 2003 lows. Thinking out loud, that may be less of a possibility given the time factor associated with the additional move from what I believe was the economic peak in May of 2006 to the ultimate S&P peak in September of 2007. That move came because of the size of the global imbalances that will ultimately lead to further downward pressure in a correction. Of course, no one on Wall Street is calling for anything similar. In fact, most are calling for a pick up in the market and the economy in the second half of the year. That's just a few months away. I see nothing to support this perspective other than wishful thinking. I wish for that too but the odds are extremely low at this point in time. So, that being the case, I could envision an upcoming selloff followed by a failed rally by the bottom pickers into the second half of this year to fulfill the general belief that the economy will pick back up. But, that's simply based on anticipated market behavior rather than anything else.
In closing, isn't it interesting that 400-450 on the S&P is where we find the strongest volume support over the last fifteen years? Even with an explosion of trading volume in this cycle. Let's see if prices gravitate towards volume.
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