S&P500: Time to Buy?
Time to Sell Short? Time to Do Nothing?
Peter Zihlmann
The long-term picture
In our analysis dated November 13, 2002, we recommended to Sell Short the S&P 500 at 938.37. By March 12, this Index had fallen to 788.90 or 16%. The Index is now back to where it was last November.
On the way down from the peak of more than 1,500 points reached at the beginning of 2000, we were offered three excellent selling opportunities (points 1,2 and 3). Now, at point 4, it is fair to ponder the point of whether we should sell again?
The long-term trend is DOWN. This is a fact. Just when this trend will reverse, nobody can say for sure. In the down-trend, we make out a horizontal channel which has lasted since last June and we also see the resistance and support levels.
We cannot deny that the possibility exists that the index may break through to this resistance zone and that we could have a movement towards the 1,100 level. Nevertheless, we view this as unlikely.
We are offered, on the other hand, some compelling indications that the resistance zone will not be significantly superseded and that the next major movement will likely be on the down-side. This indicator is the Market Volatility Index:
If the past offers any guidance for the future course of action to be followed, then it would seem highly unlikely that the S&P 500 would spike upwards at a time when this index has fallen to as low as 20 points (see left scale).
Indeed, we believe we may even see something similar to what happened in March of last year: a 30% drop in the index, which would validate the old adage: "Sell in May and go away!"
The medium-term picture
The resistance and support levels in place since last summer are portrayed in the chart below.
Looking at this chart alone, depicting a nice battle between bulls and bears, one can, of course, conclude that the bulls are gaining the upper hand. It is the forth time that the bulls appear to be winning.
At this stage, it is helpful to check the relation between bullish and bearish advisors. It is a simple fact that when bullish advisors become enthusiastic and bears desponded, a change of market direction is not far.
To those who see the market higher, we regret to inform them that the next major movement will likely be down. It is safe to go and stay short.
It is a well established fact that most professional advisors are not able to use their head but fall victim to their sentiments of fear and greed.
The short-term picture
Short-term, the market is in an up-trend which began in March. The higher the market rises, the more the hearts of the bears are grabbed by fear und the bulls are fixed on bigger and bigger gains.
For this reason, it is important to recall the long-term picture which tells a different story.
The following recommendations were valid at the time of writing, viz. at
and may no longer be valid at the time of reading.
Peter Zihlmann
May 21, 2003
If you are interested in currency and futures trading or to receive our recommendations on precious metal stocks, please consult our web site www.pzim.com or email to investment@pzim.com
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