Archive for the ‘Price Levels’ Category

A recent article in the Dallas Morning News states that we just don’t have anything to worry about going forward regarding a “double dip” recession.  A double dip recession is one where you go through one recession, the recession concludes, and then it comes back again.  Of course, that would mean that the stock market would come tumbling down again as well.

September 14, 2009 edition

“I can now report that it’s time to lift up your melancholy spirits and go find something else to worry about.  Double-dip recessions are very rare events.”

“Since WWII, there are really no examples-except 1980-82….”

The writer also points out that, “you would think a 50% upside prance in the stock market would be met with some measure of confidence rather than such an undercurrent of distrust.”

The biggest mistake that the media is making in the reporting of this recession is comparing it to normal recessions and normal cycles.  The writer would need to go back further than 70 years to take a look at the full length of the Great Depression to get a better comparison. No, I don’t think that we are spiraling into a depression.  I do think that in the least a double dip recession is a high probability. 

People are distrustful regardless of the rise in the stock market.  There is rampant unemployment, a foreclosure crisis, and consumers faced with mountains of debt.  That is not even considering a Congress that is trying to ruin this country through socialistic policies. 

To get a good comparison, you can’t look at post WWII recessions.  It would be a lot like comparing apples to oranges.  This is what makes this situation so dangerous.  Yes, people are distrustful.  At the same time, people are also hopeful.  They are hopeful that the worst is behind us.  If that doesn’t turn out to be the case, confidence will be destroyed and that will be the biggest problem the markets and the economy face.  Today, at least confidence is on life support after a grueling 2008. 

Levels in the Market

I haven’t covered significant levels in the stock market in a long time.  (Click here for a description of what I mean by levels.) For the S&P 500, we are starting down a few key levels that are right in front of us.  It is a range of levels between 1042 and 1062.  The ability for the stock market to get above 1062 and stay there would be a very bullish event. 

Isn’t a rise of 55% in the stock market a bullish event in itself?  Only if the bear market is over.  Thus far, the levels necessary to declare the intermediate trend change from a bear to a bull have not occurred.  It would take the S&P 500 getting over and staying over the level of 1119 for that to occur.

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As we have talked many times in the past, one of the most important pieces of evidence that you can look at is price levels.  As a review, price levels act as road markers on the journey of investing.  They tell you if you are on track versus going the wrong way.  The price levels were telling investors back in December 2007 that if they were invested in the stock market they were heading the wrong way.  As a result (admittedly looking back), those road markers were very accurate in giving out a warning.

Price levels are nothing more than the price of the S&P 500 at the end of each market day.  Yesterday, when the stock market closed for trading during the day, the ending price level was 942.  So, if you are following the road markers and on the right track, then your investment accounts should be doing pretty good.  The opposite is true. If followed, these road markers can tell you when it makes sense to get off of the investment road completely.

Well, we have traveled up to a very important road marker. It is a huge direction changer.  If this road marker is successfully passed and if this road marker stays behind us, then being equity invested will still make sense.  In the event that we cannot pass up this road marker for good and stay under it, there is a good chance we would then be going in the wrong direction.  That road marker first starts with the S&P 500 closing and staying above the price level of 943.82. 

What happens here will speak volumes about what we are up against.  I will be posting more this week as this is something that warrants attention.

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This is not to be taken as advice.  This is a discussion on price levels and for educational purposes only.  There is no sure fire way to manage risk.  It is a process.

You’ve given us 3 price levels to watch. What should an investor’s reaction be with their portfolios given this information? Perhaps you can give a few examples?

This is a great question. I appreciate all of the questions that I have received both through e-mail and on the blog.  This is how we can learn this information together as a community. 

I want to add another layer to the discussion of price levels.  Let’s think short-term, medium-term, and long-term.  In other words, what direction is the market going in these three time periods?  Is it going up, down, or is it just moving sideways? 

Always think of the direction of the market as the direction of the value of your account. For the past 17 months, most investors’ accounts have been moving down with the long-term direction of the market.

I am only going to answer this from the standpoint of when you increase stock exposure through a stock index fund or ETF and when you decrease it.   If you are fully invested in the stock market and the stock market continues to stay above the 800 to 825 price levels, then you watch carefully.  Remember, we are looking for the market to go above 825 for things to start looking positive in the short-term. 

If the stock market were to get above the price level of 825 and stay there, then you might start to either increase your exposure (gradually) to the stock market or simply maintain what you have already invested.  As we see this morning, the stock market is already back below the 825 price level on the S&P 500.  Thus, yesterday’s close at the end of the day above 825 was not yet the positive sign that we are looking for.  

If the stock market falls below the price level of 800, that is a warning and, given the nature of the environment, might be a signal to you that it makes sense to reduce the exposure (sell) to your stock investment.  If the stock market continues to fall and goes down to 741 and closes below that level, you are taking extreme risk.  Remember the next price level down is between 575 and 600. 

It is in the short-term that investing is the trickiest.  If the market is really going to go up in value over maybe the next few months, you would want to participate and stay invested.   However, we are still in a dangerous environment, making the risk level even greater.  It truly is high risk for high reward. 

Now, for most investors, you want to look at the medium-term time period.  When the market starts to look positive in the medium-term, the risk level for investing in stocks starts to really diminish.  What would I call the medium-term?  In my opinion, the S&P 500 would have to get all the way back up to between 1200 and 1300 for the medium-term period to look good. 

The ideal time to be fully invested in stocks is when the short-term, medium-term, and the long-term are all positive.  Right now, the short-term is slightly positive, and the medium-term and long-term are both negative.

I know that this gets confusing.  However, you have to remember the objective right now.  As an investor, you always want to know what the risk and reward looks like for stocks.  The overriding principle is that you don’t want to be taking a ton of risk if there is a big possibility of you losing a lot of money.


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Just like that the market in one single day went right up into the zone of the price levels that we have been talking about over the past few weeks.  The S&P 500 finished yesterday’s market at the price level of 822 (between the 800 and 825 price level).

No doubt about it…yesterday’s rally was extremely strong.  Yes, I will have to admit that yesterday’s enormous rally added more credence that we are in the midst of a significant bear market rally that could be with us for more than just a few days.  At the same time, there are a few caveats.  If that is the case, it is probably more than half of the way completed as far as percentages go.  With the exception of a powerful bear market rally in 1929, most major bear market rallies go up between 25% and 30%.  This bear market rally has gone up roughly 21% thus far.

The market took off on the news that the Obama administration has the solution to the banking crisis.  The problem is that all of the Government-based solutions are more illusions than solutions.  There are so many problems with this solution that will just create unintended consequences.  All of the bad debts that banks hold didn’t just all of the sudden disappear with the announcement of this plan.

In order for this plan to work, the banks will still have to realize these losses, which is something that they have avoided thus far.  The Bush administration tried this approach last fall.  They didn’t go through with it because they couldn’t figure out the details.  It appears that we are not much further down the road from that initial attempt to solve the banking crisis last fall.

The worst part of this program is that taxpayers will ultimately get stuck with the bill once these mortgage backed securities lose their value.  One other item of note is that there are roughly 2 trillion dollars of these bad or toxic investments that the banking system owns.  This program only covers 1 trillion dollars of those bad investments. 


It looks like to me that the Obama administration is nationalizing the banking system without calling it nationalization. 


So what are the price levels to watch now?  Anything over 840 to 850 is stock market positive, anything below 800 would be a concern, and anything below the S&P 500 price level of 741 would be very bearish. 


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The objective of this daily stock market outlook is to help educated you on how risk and stocks work.  Although it is not always easy to take something like investing and make it understandable, this is my objective.  So, please work with me to learn this information.  If you have not done so, please read this post about price levels and trends.  It will be helpful for you as you start to learn this information.  I always welcome any feedback. 

With yet another price decline today, it leaves you contemplating one question.  At what price level will the S&P 500 stop losing value?  Today, the S&P 500 lost another 1% finishing at a price level of 676.  We are 56.8% below the all time high of the S&P 500 set in October 2007.  That does seem like an eternity ago.

In looking at all of the analysis, I have come to the following conclusion.  The good news is that I do feel we are close to that bear market rally.  The bad news is that we might have to decline another -18% before we get there.  If you are a trader, that might be an excellent point to invest money for a 30% plus gain.  I do feel that this bear market rally that we are certainly due will be a scorcher. 

If you are wanting to reduce risk in your portfolio (reduce the amount of money invested in stocks), then this should provide an excellent opportunity to get back some of the loss and start selling stocks.  No, I don’t think that will be the bottom. This is why I still think that it will be important to reduce your risk down to a level that you are comfortable.  Remember, you can accomplish that by reducing the amount of money that you have exposed to stocks and stock-based funds.

This continues to be a very dangerous stock market like none we have seen since the 1929 to 1932 bear market.  Invest very carefully.

Update Tuesday Morning 3/10/09

Markets look good right out of the gate this morning with the S&P 500 on its way to test the price level of 700.  If the market can close above that price level (700), that would be a real positive.  Then we would want to see some more of the same over the next few days.

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I was trying to figure out the most useful information to write about for this morning’s Prudent Money Market Outlook.  I went straight to the stock market chart to see what the charts are saying.  I must admit it is amazing to see the rate of decline and the breaking of those price levels.  If you are a new reader of the market outlook, please read this post about price levels.  It will help you understand a lot about this analysis and how the market works.

I wrote last week that 741 was ultimate line in the sand.  As of Friday, we sit just a little under that level at 735.  That is significant for many readings.  We finished the week and the month at a very negative level. That foretells a lot of problems ahead. 

For the year, the S&P 500 is down an alarming -18%.  From the top in October, we are down -53%.  The S&P 500 is down -42% since September ‘08.  The worst 2 quarter return in the history of any market is -48%.  With one month to go, will we break that record with a horrific March?

So where are we now with price levels?  As I write, the pre-market numbers are looking pretty bad, indicating that we are going to open today at a loss.  The stock market does go up and down prior to the 8:30 a.m. opening.  You can get an indication of how the market looks by looking at the futures market.  If you are ever curious the night before how the stock market is doing overnight, you can check out this link

I would describe the price levels for the stock market as being in no man’s land.  The hope would be that the market would bounce back after closing below 741.  Thus far, we are looking at a 2% or greater loss at the opening of the market.  Unfortunately, there is not another meaningful price support level until around 600 for the S&P 500.

That is another decline of -18%!  As a review, price support is a level for the stock market where it shouldn’t decline beyond that point.  As 741 was an important price support for the stock market, so is a price support level around 600.  If the S&P 500 cannot stay above the price level of 600 (fudge factor of 575 to 600), then you are looking at a decline down to (what I would call) the bear market ending price support level of 493. 

If we do decline down to 600, that could very well be the low for 2009.  Yes, I do think that there is a possibility that the S&P 500 will decline to 493.  I don’t think that is a 2009 event.  So, every day is a critical one for the stock market.  If you are stock market invested, you might hope that the market recover very quickly.  If not, we might be at 600 before you know it.

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Well the Fed Chairman speaks, and the markets like it.  Well, at least that is what the media is assigning to the better than 3% lift in the stock market.  The market was at a 12 year low yesterday and extremely overdue for a good day.  That is more like the real reason. 

Chairman Bernanke said that there was a “reasonable prospect” (wink, wink) that the recession will end in 2009.  He also warned that credit and financial markets would have to start “operating normally” again for a recovery.   Besides being the master of the obvious, he might want to count out 2009 if he is looking for normal operating markets. 

Unfortunately, he probably cleared a lot up for those politicians by essentially telling them that things would have to get back to normal for us to recover.  So, you can see why the markets are not rallying because of that nonsesnse on Capital  Hill today.  There was very little enlightenment.  Chairman Bernanke’s time on the Hill today was nothing more than an opportunity for the politicians to blame someone other than themselves for the mess we are facing today.  

Yesterday, I wrote about levels on the market.  Let’s look at some levels on the upside.  Remember that 741 is critical on the downside.  On the upside, I will give you a range of 800 to 820 on the S&P 500.  That is where the market might have a little trouble.  However, that would give the S&P 500 about a 10% advance off of yesterday’s lows.  It would be a positive step in the right direction for the market to advance pass those levels.  We are in a precarious position right now as the market will continue to go through a bottoming process. 

President Obama is speaking tonight.  Let’s see if there will be an Obama effect tomorrow. Thus far, since he has been inaurgurated, the effect has not been a good one.

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