Sunday, February 22, 2009

The Stock Market Sits at Critical Support Levels

Good Evening Folks!

Before the trading week begins, I wanted to share a chart explaining why its critical that the market holds the 2002 lows that we once again broke last week:



The Breakdown:

This chart only runs through 2008. We have dropped some more since this was put together so here is where we are at. We now currently sit at 770 on the S&P which means we officially are below the 2002 lows. However, we are still sitting above the S&P closing low of 751 for the current crisis that was set in November.

Luckily in November, the S&P quickly rebounded from 751 low and quickly moved up over 800 which got us out of the woods. Folks, anything under 775 means that we are in the danger zone in terms of breaking the lows. Sitting here at 770 means we are once again staring over the edge of a cliff. Its critical that we hold 751 this week.

The reason I say this is if we break sharply south below 751, there is almost no resistance in the chart until we get back to the 1995 levels on the S&P. As you can see above, the S&P was at 500 back in 1995!

That's a potential 30% move to the downside from here. Pretty frightening isn't it? Now if we break below 751 it doesn't mean we head straight down to the 1995 levels. However, a sharp move south below 751 could definitely bring us to the 600 level on the S&P in a very short period of time.

If we break right through 751 I will be adding some short positions. Ultimately, my best case scenario is 1995's 500 level on the S&P marks the bottom in equities.

This was initially my market low, but I have now taken this off the table because the government policy response to this financial crisis has been disastrous. The economy has slowed much more sharply than I had originally anticipated and economies all over the world are on the verge of collapse.

If transparency doesn't come back to the markets, I think we could head down a lot further below 500 down the road. I mean lets be honest: We dropped 90% in 1929 and many are now saying this situation is worse. As a result, how can you take this off the table?

I highly doubt a drop like this could happen, but then again, I have said that about a lot of things during this crisis only to find out later that the impossible is possible.

7 comments:

teddy bear said...

crisis? what are we talking about?

http://tinyurl.com/cohyk2

:DDD

Jeff said...

40k for some Dom!

OMG

Your on a roll today Teddy!

Keep em comin..lol

Avl Guy said...

Dan Greenhau,Equity Strategy Group at Miller Tabak + Co., commentary on an S&P bttm. He covers markets and portfolio theory. (excerpt from TBP blog)

"...but it’s clear that equities simply are not pricing in the type of economic contraction that is increasing in probability... $65 earnings ...no longer seems likely and while I don’t have a firm grasp on what that number should be (who does?) we can do some basic math to see where we’re at.
...historically equities have found a bottom anywhere from 11x-13x earnings. Slap an 11x multiple on various price targets. Below is where the S&P should trade based on an 11x multiple of earnings at various points. Following the price target is the percentage the S&P would need to fall from last night’s closing level of 778.94 in order to get to “Fair Value” assuming the multiple and price target hold.
$60 x 11x = 660 15.27%
$55 x 11x = 605 22.33%
$50 x 11x = 550 29.39%
$45 x 11x = 495 36.45%
$40 x 11x = 440 43.51%
I am in no way endorsing any of those price targets at this time but again, its clear that $65 isn’t going to happen."

http://www.ritholtz.com/blog/2009/02/65-earnings-on-sp500-for-2009/

Odds on SlumDogs sweeping Oscars 2nite?

Jeff said...

avl

I heard sulmdog is an excellent flick. Haven't seen it yet.

Well, it looks like Citi is getting another sticksave. whats this the third bailout for them?

Futures are up on the news:

"Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. The proposal was made by Citigroup to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks."

http://online.wsj.com/article/SB123535148618845005.html

Avl Guy said...

Jeff, is the Obama Admin simply "creating" news to "inspire" confidence on The Street on a ad hoc basis? The pattern to-date seems as bad and blatant as it was under Paulson.

Their window of time is closing before Nov 09, when the campaiging for the 2010 mid-terms gets ugly; they should take the irrepressible fall in stocks now rather than later.

jeff said...

SVl

Good question.

Who knows. whats this the 3rd bailout of Citi?

This is such a joke. They just continue to throw money into these black holes. Its such a waste.

Its pretty obvious that Wall St. has turbo Timmy in their back pocket just like they did with Paulson.

The whole system is just so filled with corruption. I was hoping Obama would stand up to these guys. Apparantly he is on their team.

It really sucks

Minton Mckarkquey said...

Just to let you know - the bankers story is an urban myth they run in the papers every few years in the UK. If you doubt it, the receipt is printed using Aloha's POS system, which only allows items up to 999.99 each. :-)