How have S&P projections fared?

nanosensor

NewsHow have S&P projections fared?
December 31, 2009 Thu 10:30 AM CT


For long-time readers, the weekly chart posted here today will be very familiar. We have tracked the S&P 500 for the last several months and, on this last trading day of 2009, we can now see if earlier year-end projections will hold true for the index.

In the summer I drew a yellow linear regression line through the March to July uptrend. I then projected that line forward into time to see where it might end the year, as long as the trend remained intact.

Because there is a lot of variation in price within such long-term trends, I drew bands around the yellow regression line at plus or minus 3 percent. As you can see, that did a reasonable job of capturing most of the price movements over time.

The big dips below the lowest band came during July and October earnings seasons but were corrected very quickly. The potential levels this gave us were 1196 at the top band, 1165 at the regression line itself, and 1130 at the low band.

Although we are not quite at that 1130 level today, we came within less than 3 points of it this morning. That means the trend was, for the most part, remarkably stable--which is all the more impressive given the incredible volatility that preceded it.

More subtle indications of the trend, however, tells us something more. Although we are ending the year very close to the projected zone, the S&P's pricing has decayed a bit over the last several months.

Notice how price was once at or above the regression line, a sign of real strength. Since the October dip, the index has seen resistance at the line and has mostly hugged the lower band.

That could be nothing at all or simply an indication that traders want to see more information next year before aggressively pushing prices higher, presuming news supports such a move.

Yet there is also a risk that the trend has begun to exhaust itself, a possibility that must be monitored closely in January. Despite opinions to the contrary, true tops take a long time to form, often much longer than do bottoms.

There is a risk that this is exactly what is now underway.