S&P 500: Time to Buy? Time to Sell Short?
Time to Do Nothing?
On August 6 of last year,
we presented the chart below and suggested that the "bear market rally" had likely reached its zenith. We added, however,: "We cannot deny the possibility that the index may break through this resistance zone, and so we may see movement towards the 1,100 level. "
As we now know, the "bear market rally" did not of 1163 points in early March of this year.
In January, the S&P 500 reached 1155 points, touched a high of 1163 points at the beginning of March,
and has since lost about 5%. It is now time to re-examine whether the moment has come to sell short.
The long-term picture
The above chart demonstrates that the current bear-market really has been stronger than any of 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. It should also be observed that the down-trend-line could not hold back substantial buying when the Index pushed higher.
Nonetheless, we can also see that from the beginning of this year, the index has made little headway. While one could argue that we are still in an up-trend with which we are experiencing a slight correction, we must also realize that the market is rapidly losing strength.
So let's move on to the medium-term picture to find out what the next likely movement may be:
The medium-term picture
It is quite obvious that the up-trend line has been broken and that the moving averages are crossing for the first time since April of last year. This signals a deterioration in the technical strength of the market. It can also be observed that the market has been moving side-ways since the beginning of the year and that we had a little sell-off in March. Significant, in our mind, is the fact that the minor rally that followed was unable to reach a new high and the subsequent one was lower again. The market faces a major test in the weeks to come. Should it close below the low of 1087 points reached toward the end of March, we are likely in for a major correction, if not for the resumption of the bear market.
The short-term picture
The short-term picture reveals more clearly where we are heading. To our mind, it is evident that the market's vigor is hastily waning. While the 1100 point area may hold for a while, we think it inevitable that it will give way to selling pressure rather sooner than later and that we are likely to have a quick move towards the 1000 point level as investors attempt to salvage those gains they may have accumulated during recent months.
The Market Volatility Index
This Index usually has an excellent record in forecasting future market movements. We notice that it fell to a low of 14 points in the first quarter of 2003 and moved back up to 22 points during the spring sell-off in 2004.
It fell again to 14 in April and has recommenced its upward move. It suggests as well that the timing to short the market is propitious.
The above recommendations were made on
and may no longer be valid at the time of reading. Yours sincerely,
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
May 5, 2004
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.
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