Case for 1050 on the S&P 500 within 30 days:
- Shiller PE now over 20 (historical average is approximately 16)
- Bull/Bear Ratio (Investor's Intelligence) elevated and trending lower (1.8)
- VIX below 18 (suggesting complacency and that volatility is likely to increase greatly in the medium term)
- RSI > 65 and Slow Stoch %K > 90 - Suggests that price momentum is near its short term upper limits
- NYSE Up/Down volume ratio near its upper overbought threshold
- SP500 grazing by its upper bollinger band (also bollinger bands are narrow suggesting an increase in volatility [a breakout in one direction]
- Yield curve likely to flatten somewhat over the next quarter (10 yr - 3 mo Treasury bonds) as the Federal Reserve becomes more hawkish with monetary policy. The wrapping up of ZIRP and excess stimulus may prove to be a pivotal catalyst that realigns expectations to more reasonable levels amongst the consensus of market participants.
- Expectations for 2010 and 2011 earnings are optimistic- Has the SP500 ever eked out a 20% year over year gain in earnings over two consecutive years? Even if we have a stellar year in 2010 earnings, expectations for 2011 may be a dead-weight on future price performance. This is a signal to me that the market may have "gotten ahead of itself"
- ECRI Leading growth slowing & ECRI Coincident quite weak
Given the above adverse elements I issue a moderate sell rating on the SP500. Overall, I see a risk of at least a 5% correction (with greater than 50% odds of -8.5%) over the next 30 trading days. However, it should be noted that I expect economic growth for 2010 to be trending higher and for SP500 earnings to gain at least 15% for the year.
Next 30 trading days target: 1050
End of year target: 1240
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