S&P 500: Time to Buy? Time to Sell Short?
Time to Do Nothing? Follow-up No 3
Peter Zihlmann
On May 21, we presented the chart attached below and added: "We cannot deny the possibility 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 also added: "The long-term trend is DOWN. This is a fact. Just when this trend will reverse, nobody can say for sure."
We would like to examine today whether our basic recommendation - to sell short - still holds.
The long-term picture
Looking at the chart below, we notice that the current bear-market really has been stronger than the previous ones.
We also see that the Index has gone right through the long-term moving average, a thing that did not happen on previous occasions. At the same time, we also notice that the down-trend-line could not hold back substantial buying when the Index pushed higher.
Does this suggest that the bear-market case has to be buried?
The long-term trend is still DOWN, we believe. Since we made our sell-recommendation on May 21st at 944 points, the Index has in fact made little head-way and stands less than 4% higher at present. The Index reached 1015 points on June 17, and again on July 14, in spite of what some interpret as "encouraging" economic news.
But is the news really encouraging? Have any of the basic problems been solved? NO!
The Contrary Investor writes:
" We expect the behaviour of financial market participants ahead to change, given our most recent experience. Too much money has been lost over the past six weeks for this episode of volatility to be forgiven in pricing anytime soon. And that tells us one thing and one thing only - the price of credit is going up. Because what's different this time is that the Fed no longer has any magic bullets."
When the price of credit starts going up, where will the money for consumer spending come from?
We mentioned last time that the Market Volatility Index vs. S&P 500 had fallen to a low of 20 points. From the past, we know that such a low mark normally signalled a market decline. You will note that this Index has started to move up (see arrow) while the market started to weaken.
The medium-term picture
The resistance and support levels in place since summer 2002 are portrayed in the chart below.
The bear-market rally that started on March 12 at 788 points and lifted the Index by 29% shows signs of exhaustion. It made two peaks at 1015 points in June and July but has since fallen back into the resistance zone.
The US Government together with the Fed, on the other hand, spare neither trouble nor expense - understandably - in order to save the US economy from collapse. But the fact remains that the US deficit is now running over 5% and getting worse.
We think therefore that the US markets are in the final phase of the bear-market rally and that it will make little difference six months from now whether you shorted at 950 or 1015. Having shorted at 1015 would have been an exceptionally lucky strike.
It is furthermore a well-established fact that most professional advisors are not able to use their heads, but fall victim to their sentiments of fear and greed.
The short-term picture
Short-term, it becomes even more evident that the market has lost stamina and that the next important movement is likely to be DOWN.
The following recommendations were valid at the time of writing, viz. at
and may no longer be valid at the time of reading.
Yours sincerely,
Peter Zihlmann, www.pzim.com, or email to forex@pzim.com
August 7, 2003
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
Email this Article to a Friend 
Printer Friendly Version
