Despite the short-term memory-losing recency-biased perspective that a 2-day rally in stocks has seemingly set in investors' minds, Citi's FX Technicals group remains concerned that the S&P 500 is stretched by historical standards. At this point, they add, the S&P is more stretched than in 2007 and a bit less stretched than 2000 with the line in the sand around 1,700.
Via Citi FX Technicals,
The S&P 500 is stretched by historical standards:
– At the peak on 15 Jan 2014 the S&P was 12% above the 55 week moving average which itself was 20% above the 200 week moving average
– At the peak in 2007 the S&P was 8.5% above the 55 week moving average which itself was 14.5% above the 200 week moving average
– At the peak in 2000 the S&P was 14% above the 55 week moving average which itself was 29.5% above the 200 week moving average
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So at this point the S&P is more stretched than in 2007 and a bit less stretched than 2000. In both those instances you would have expected (and in fact got) a correction down to the 200 week moving average once support at the 55 week moving average was broken.
However, in both those instances we ended up going much further than the 200 week because of the knock on effects of another asset in the US (In 2000 it was the NASDAQ which saw an 80%+ drop and in 2007 it was the housing market which dominoed into a financial crisis).
Another dynamic at play here is the similarity between 1998-2000 and 2011-present:
– In 1998 the S&P saw a 22% high to low correction on the back of Russia’s default which was followed by a 68% into the 2000 high
– In 2011 the S&P saw a 22% high to low correction on the back of the European crisis/Greek defaults which was followed by a 72% rally into the high so far from January
At this point, though, we certainly do not expect the type of correction seen in 2000 but the parallel certainly speaks to just how stretched the move over the last few years in the S&P has been, especially when comparing the backdrop wherein the late 1990s saw low unemployment and high GDP growth compared to the more recent anemic recovery (and the potential beginning of the end of easy money by the Fed).
For now we have not seen the break of any significant levels which would suggest much lower levels are likely in the near-term; however, they are certainly on the horizon:
– Initially watch supports around 1672-1697, the converging 55 week moving average and 12 month moving average (see below for more).
– A break below there, should we see it, would open the way towards the 200 week moving average at 1387, 25% off of the highs
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The 12 month moving average has been a significant level on a closing basis as can be seen by the rare breaks below (marked by black circles):
– August 1998: S&P closes below the 12 month moving average for the first time in 43 months and we saw a 22% high to low correction
– October 2000: S&P closes below the 12 month moving average for the first time in 24 months as the S&P begins a 50% high to low correction. After regaining the 12 month moving average in April 2003, the S&P stays above it until
– December 2007: S&P closes below the 12 month moving average as the S&P begins another 50%+ correction
– June 2010: S&P closes below the 12 month moving average and sees a high to low move of 17%
– August 2011: S&P closes below the 12 month moving average while posted a high to low decline of 22%
If we were to see a monthly close below the level, it would be in our view a very bearish break and suggests that we are in the process of a high to low double digit percentage correction with the obvious target being the 200 week moving average (if the 55 week moving average also gives way)