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As discussed in the last 3 or 4 articles, the S&P 500 (SPX) defended and closed above its notorious 850 support level nine separate times in the last month and a half. The technical and contrarian action indicated that the probabilities lied with a short-term base being built and a subsequent bounce up toward the 3rd quarter’s close (1,150 or so). However, the SPX just couldn’t hold any further investor uncertainty and the improbable became reality.
Yesterday the SPX breached our risk level and closed at 806; a yearly (and 5-year) low. Whether it was economics and employment, fundamentals and the “Big 3”, governmental table pounding and the constantly “Morphing” TARP (Troubled Asset Relief Program) or a compilation of all the above, our defined risk threshold was surpassed.
This technical action, in our humble opinion, changes the short-term market dynamics. This is not to say the market will not go up from here but, we now believe there is a higher probability of a bigger drop than potential advance at this juncture. Hence, investment prudence dictates the long positions we put on throughout the bottoming process of this latest technical base, since the end of the 3rd quarter, be relinquished and we returned to a defensive stance. We were willing to take a certain amount of risk given a calculated reward. This no longer holds true. As they say… “Fish or cut bait.” Well, we cut bait and will look for another time to put back in.
With yesterdays move, the SPX index is now down over 48% from the October 2007 peak and down over 30% just in the 4th quarter of 2008 alone. Over 30% in less than 7 weeks – almost 17% in October and another 17% in November – who would have thought?
During yesterday’s calamity, and our change of stance, the immediate question arose of… “Where do we put back in?” The answer is two fold. First is patience. The last time the market broke a support, at the end of the 3rd quarter, the market continued to drop for 7 days without reprieve. We first have to see where the chips fall. If the selling begets selling, which is typical, then the exacerbation could drop the market another 12 – 20% form here.
Second, and more importantly, the 2003 lows are at 770 on the SPX and if these are broken the next support can’t even be pulled up on a 5-year chart; they will be levels from 1997 and 1996 (11 or 12 years ago). Possibilities lie, if 770 is breached – down to 600. Wow, it hurts to even say that.
In closing this short piece we just want you to know that the prior comments made in past articles of… “We will not hesitate to pull the ripcord and return to a defensive stance….” held true and we stood by our analysis.
Until next time.
Sincerely,
Kevin A. Tuttle
CEO
