Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Four Reasons Why the S&P 500 Is Topping Out

Monday, January 28th, 2013
By for Profit Confidential

The “January Stock Market Indicator” is based on a loose theory that says if the stock market does well in January, it does well for the remainder of the year. While the first half of January was lackluster for the key stock indices, things really picked up in the second half of the month. But this time, the remainder of the year will be different for the key stock indices. Optimism is far too high, a negative factor for key stock indices.

According to a survey done by Bloomberg, international investors are the most bullish about stocks in at least three and a half years. A total of 53% of the respondents to the global poll believe that key stock indices around the world will provide the most return—this number is 17% higher than when the survey was done in November of 2012 and the biggest jump since the survey began in July of 2009. (Source: Bloomberg, January 2013.)

As optimism has continued to build up, the stock market rally persisted. I have been reading analysts and stock advisors who predict stocks will break above their record highs.

I can’t predict the exact top, or the exact point where the stock market rally will come to a stop, but, as I have been writing, I believe we are very close to the top.

Let’s look at the chart of S&P 500 below.

$SPX S&P 500 large cap index stock market chart

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Chart courtesy of www.StockCharts.com

On the chart, you will notice that since the stock market rally began in 2009, the moves to the upside were fairly quick, until 2011, when the S&P 500 had a “bad” year. Since then, the S&P 500 index has struggled on each subsequent high.

Each new advance for the S&P 500 has taken longer, which gives me cause to believe the rally is running out of steam. As an example, when the S&P 500 bottom was put in during March of 2009, the S&P 500 had a huge rally to 950 by June—a quick three-month bounce.

Fast forwarding to 2011 and, after the S&P 500 made its low for the year in October, it took until March of 2012 for the index to break above its 2011 highs—five months to get this rally going.

The trading patterns on the S&P 500 are also getting narrower and narrower. Look at the two lines drawn on the chart above; they are suggesting a formation of rising wedge pattern, which is considered a bearish chart pattern. And look at the volume at the bottom of the chart; it’s been continuously declining since 2009—another bearish factor.

It certainly does look like the S&P 500’s climb to the upside is slowing down. Finally, earnings of companies in key stock indices declined for the first time after 11 quarters in third quarter of 2012.

There you have it; four reasons why the S&P 500 stock market index is topping out.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in Profit Confidential, August 2, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles