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S&P 500 Review

Monday, October 06, 2008 | 06:00 AM

in Index/ETFs | Markets | Quantitative | Short Selling | Technical Analysis

In our office, we've been using the Fusion IQ quant system for so long, we know it inside out. We use it as the basis for our institutional trading and published research (up ~10% for the year).

Subscribers have asked us to include our market and stock commentary -- beyond the pure neutral software application. In addition to the tools index rankings, there is also an "S&P 500 Marketometer" -- an intermediate term gauge of the S&P 500’s internal health. We use this as the basis of our own market review. As requested, we include our own application of the quantitative equity ranking system. This means in addition to the equity, index and sector work, we upload our own technical and macro commentary, too.

My partner Kevin Lane is a well regarded technical analyst who built his reputation recommending Enron and Tyco be shorted long before it was fashionable. He is usually the yin to my yang, bullish to my bearishness. Here is his most recent technical commentary about the S&P500:

S&P 500 Index (SPX) - Daily Chart (1999 to Present)

As seen above the S&P 500 broke through what was once a solid support area (green lines and maroon dotted circle) in the last few days of trading last week and continued falling. This support break was critical as it sent a message to market participants that this corrective phase is not yet over. The next support zone for the S&P 500 now comes into play in the 1,015 to 960 zone (blue dotted lines). At these lower support levels, particularly the 960 level, we would likely see a powerful rally set up as the S&P 500 would hit support while also being deeply oversold and more than likely have absorbed a massive selling purge. These aforementioned factors along with a likely new 10-year high in the VIX (if this lower support level is hit) would suggest negative sentiment had peaked.

Trend, Breadth and Momentum are all bearish; Liquidity is bearish to neutral. The only element that is remotely bullish is Sentiment.

As we said to clients early last week (prior to these supports being violated) market internals and momentum were all very negative and the path of least resistance would remain down.

This still remains the case.