CNBC Report by Bill McLaren – 24 April 09

FIRST LET’S LOOK AT THE S&P 500 DAILY CHART

The past four weeks the index has been struggling upward as each instance it breaks to a new high it immediately falls back below that high. But within that pattern of trend each move down was becoming smaller and smaller indicating buyers were willing to come in at very high levels. Now there is a two day move down that exceeded the two previous moves or counter trends down in price. If this is a top then we will see a rally of 1 to 4 more days that will either fail to reach the high or get just marginally above that high and then trend down with support at the 800 level.

If this is a new leg in a bull campaign the index will drive above the last high and counter trend down and show support on top of that resistance and take off to the 950 level.

NOW LET’S LOOK AT THE FTSE 100

This is the weakest of the markets I follow especially relative to the DAX and CAC 40. You can see this is a weak trend and the last move down was 4 trading days and now it is up 9 days and still way below the high. A new high would be three thrusts and a likely top but trading this many days below the last swing high is a market struggling. So if the world indexes start to trend down this is the weakest and will show the strongest move down.

But notice one important aspect of this chart which can be seen in many other charts. Except for the false break in March the index has been moving sideways for over 6 months and that could be establishing a base. I don’t have any evidence to indicate that probability but the charts say that is now possible. But this index is so weak it wouldn’t be the choice for the long side and could still be in a severe downtrend.

LET’S LOOK AT THE 1938 DOW JONES

Other than the 1930′s decline there have only been three other instances where the index declined 50% or more. The 2000/2002 decline, the 1973/1974 bear trend and the 1937/1938 decline. Last month we looked at the 1974 base and this chart is 1938 low and base. All of the instances where the index fell 50% the index didn’t change the trend to up until a significant base was formed. This (1938) market had an October capitulation and a November break of that low and a new low in March exactly as our current circumstance. You can see after the March false break low the index showed two higher lows and once that base was complete the index took off running like it stole something. We are looking for a higher low to develop to confirm the possibility of a base forming. And for now we are looking of evidence of trending down with a weak move up next few days it help set that up.

Source: McLaren Report

Top Strategists Still Expecting a 46% Gain From Here

While two more Wall Street strategists lowered their year-end S&P 500 price targets recently, collectively they’re still looking for a 46% gain from the index’s current levels. As shown below, UBS, Goldman, and Credit Suisse have now lowered their year-end price targets since the start of the year. The UBS move from 1,300 to 1,100 makes Deutsche Bank the most bullish with a target of 1,140. Barclays has the lowest price target of 874, which would be a 27% increase from here.

A Look At 10-Year Market Returns

The New York Times published an article this weekend highlighting that the current 10-year stretch that ended last month was the worst for the S&P 500 in at least the last 82 years.  The Times looked at total returns for the S&P 500, and below we provide a similar analysis of the 10-year rolling price change of the Dow Jones Industrial Average going back to 1910.  As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time.  While it may have taken ”buy-and-holders” a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.

When looking at 10-year returns, however, where the market was 10 years ago is just as big of a factor as where it is now.  Ten years ago, the market was just about to hit the peak of the Internet bubble, and once it burst, the 10-year return was destined to take a big hit right about now. 

Below we highlight a hypothetical 10-year return chart going out to 2012 if the Dow were to stay right at its current level.  As shown, the return would continue to get negative and drop all the way to -29.49% in January 2010 before finally starting to head higher.  And even if the Dow stayed the same, it would end up turning positive again by late 2011, since the market had fallen so much by late 2001.  If the market gets worse in the next couple of years, the 10-year returns are going to get worse.  But even if the market heads sharply higher from here, the 10-year returns will still be negative to flat until we get past 2010.

Source: Bespoke Research 

China Breakout

To get exposure to the China market we suggest using Tricom Trader (download demo here) and the iShares China 25 ETF (code: FXI) which is available as a Stock & CFD (15% margin).

ln early December we pointed out that China’s equity markets were beginning to show signs of stability.  After rallying a little further after that post, however, China’s market pulled back once again, but it never broke below its prior lows from November.  Now, China has staged another short-term rally, and it just broke out of its multi-month trading range today.  From its low in November, China’s Shanghai Composite has rallied 23.5%, and its technicals have turned positive once again.  But as shown in the top chart below, the index still has a long way to go before it puts a dent in the declines seen in ’07 and ’08.

Source: Bespoke Research

Long-term charts of the financial sector

“A look at long-term charts of the S&P 500 Financial sector is downright depressing. The first chart below dates back to 1990, and as shown, the sector closed at its lowest level since March 1995 yesterday. The sector is now down 79% from its highs in 2007. A chart of the sector all the way back to 1940 shows just how much the sector has fallen in such a short period of time.”

Source: Bespoke, January 21, 2009.