A substantial moving average cross occurred in June 2009. The S&P was at the 900 level at the time. One could argue that the bears and the bulls were fighting over the 900 level from September 2008 to June 2009. If you take out the brief run in to the 600s, which I believe was fueled by panic, the number the market wants to embrace, like a worn, old blanket is 900.
Because of the uncertainty in the global economy, the market needs to test old lows for verification. If the price action is not verified, the numbers become arbitrary. Price discovery is not validated. Watch for the S&P to find support at the 900 area, because the market has rigorously tested the 900 area. This will take place in September and October, unless the Fed pulls a rabbit out of the hat. If that happens, then I will be watching for this scenario to play out in January and February 2011.
There are two culprits causing the uncertainty in the markets. The bearish macroeconomic data versus bullish, cost-cutting corporate America. Current EPS and future estimates of EPS, for public companies, are what ultimately determine price action. One factor, for companies lowering guidance, is the continuing high unemployment rate. This is being used as a guide to predict future consumer activity. The assumption is that, lower consumer spending, means lower future EPS levels. There are two factors that would support a counterintuitive approach.
The first variable that many refer to, is the amount of dry powder on the sidelines. The second reason, I haven't heard much reference to, is the exponential population growth. In other words, a growing number of consumers. One could argue the new workforce generation does not have as much to spend. One could also argue that a percentage of the boomers cash stockpile will be deployed to that generation for spending. I would be interested to see a statistical analysis directed toward this "kanundrum" ;i.e. negative consumer variables versus positive consumer variables.
There are a couple of factors that I have been monitoring, that could affect the metaphorical floor of the market. The ability of our government, or any government for that matter, to continue to print money to prop up the economy. Also, the capability of the consumer to use high yield credit, for everyday and unnecessary purchases. If consensus opinion on either of these issues turns negative, I think the 900 level is sinking sand.
There is enough cash in our economy to support corporate earnings. The trillion dollar question is; what will it take to unclog the financial markets. My guess is time. My hat is off to all the brave souls who tread these murky, market waters.
