Posted by: Ben Levisohn on May 11, 2009
Is the market’s run over? Greg Troccoli thinks so, at least for the time being. Even before May 11’s drop of 2.2% in the Standard & Poor’s 500, Troccoli was selling. Why does that matter? Because Troccoli, director of technical research for alternative investment news outlet Opalesque, has been correct through the market’s run-up. On March 6, he announced he would be buying, and two trading days later S&P 500 had bottomed and was on its way up. Later, he told investors they should chase the market if the S&P 500 closed above 874. Those who took his advice and bought the open the next day made over 3% as the S&P 500 shot up to 907.
But on May 8, with the market up 38% from its low, Troccoli sold. And he’s not the only one. Other technical analysts, who like Troccoli called the bottom, also see the mid-900’s as a possible selling point. They include Blaze Tankersley of Bay Crest Partners and Standard & Poor’s Mark Arbeter. Should investor’s follow their lead?
The argument for selling is fairly strong. In January, the S&P 500 peaked at 934.70 before crashing to its March low, and the market will need to close above that before Troccoli is convinced the market’s going higher. (The fact that it closed at 929 on May 8 only drives that point home). Arbeter sees resistance in the same area, with added resistance compounded by the 200-day moving average, which sits around 952. “Many times in a major bottoming process, the initial rise up to the 200-day average fails right near the average, and then we finally get a pullback or correction,” Arbeter says.
But for once, technical analysts aren’t uniformly bearish. In his May 11 newsletter, Ed Yardeni of Yardeni Research acknowledges that there could be a 10% pullback in the market. However, he sees enough momentum to break through the resistance. He writes, “My hunch is that the S&P 500’s rally can go still higher, maybe to 1000… That would make for a whopping 69.9% gain from the March 9 closing low.”
InvesTech Research’s James Stack also sees room to the upside. Skeptics call this a dead-cat bounce, meaning that only the stocks that have crashed the hardest go up. And while the financials have been the biggest gainers since the market’s bottom, nearly every sector has participated. A case in point: Even as the broader markets, as measured by the S&P 500 and the Dow Jones Industrial Average, fell hard on May 11, the tech-heavy NASDAQ was down only slightly, around half a percentage point. “It’s that kind of performance in other sectors that leads us to believe that this is more than a bear market correction,” Stack says. He says another 10-15% of upside is possible before the end of the year.
Even Troccoli himself hasn’t given up on the market. He looks at the 21-month moving average and sees a noticeable difference from past recessions. During 2000-2002, for instance, the market and the moving average moved in synch. During this bear market, there’s been an enormous disconnect, with the market falling much further than the moving average. And even after the rally, the two are separated by nearly 300 points, an indication that the market may still be oversold on a long term basis. Trocolli’s looking for a close in the S&P 500 above 939. If that happens, “the market can get up to 1000 or 1050,” he says. “1100? That may be pushing it.”