Fading the S&P 500 Index (SPX)

One thing the S&P 500 Index (SPX) seems to have lacked of late is strong afternoon momentum. If you were to look at intraday charts of the SPX going back to late April (26^th), you would see the index has favored weakness into the close (in the last 30 minutes of the trading day). In fact, about 77% of the time during the past few weeks, the price of the index has moved lower as the session’s closing bell approaches.

If you look at market breadth and momentum, they too are faltering late in the day. From my experience, this is a sign of fear in the markets and is more indicative of a bearish overall sentiment as opposed to bullish. It indicates investors’ reluctance to take on new long positions into the close.

Some of this might be due to the geo-economical and political issues swirling in Europe and some might be due to the technicals themselves. Regardless, this may be a trend to pay attention to as it could lead to lower numbers in the SPX over the near term.

Sure, if you look at the index’s 200-day simple moving average (SMA) – which many technical traders do to determine longer-term trends – the index is still trading above it. The 200-day SMA currently stands at 1,100, with the SPX just 35 points north.

The short-term change of trend actually came a couple weeks ago when the 20-day SMA was breached to the downside on the on April 27 when the S&P was trading right around 1,200. Then came the breach of the 50-day moving average (at 1,170) on May 5, a day before the notable crash. I noted this level on CNBC that day and the S&P closed below it, which was a bearish sign for technical analysts.

So fast forward 13 trading days and 70 points later and here we stand, approaching that 200-day moving average with weak afternoon trading being the norm, not the exception. For shorter-term traders, the technical indicators are mostly pointing to the downside.

The beauty of the marketplace, however, is the difference of opinion, time horizon, and risk profile that we all have. Fundamentally driven, longer-term traders may be looking to begin to acquire S&P stocks at a relatively cheap price relative to earnings multiples. They may be willing to ride out the storms.

As for the shorter-term traders, be sure to keep an eye on those key technical levels, especially the 200-day moving average in the SPX. The CBOE Market Volatility Index (VIX) is currently trading at about 33%, which would indicate roughly a 2% daily standard deviation in the SPX. In reality, this is just a little bit less than what we are experiencing in the marketplace today.

Photo Credit: WeiterWinkel

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