S&P 500 Standing on the Edge of a Cliff?

The notorious S&P 500 looks to be standing on the edge of a cliff. If you are familiar with technical analysis, what you will notice is that a significant amount of companies that make up the S&P 500 are breaking below the uptrend they were enjoying earlier this year.

For those not so familiar, in technical analysis terms, this means that the S&P 500 companies’ stock prices were making successive new highs, but are failing to do so now.

Why should you be cautious? Technical analysis suggests two main pointers about trends. The first is the old adage, “The trend is your friend,” to which I would like to add, “…until the trend is broken.” Secondly, don’t go against the trend, as a decisive trend can virtually go on forever. The S&P 500 companies that are breaking below their uptrend can potentially drag the whole index lower.

There are five companies that have a combined weight of more than 10% on the entire S&P 500 index. All five companies recently broke below their respective uptrends.

These S&P 500 companies I’m talking about are Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAW/GOOG), The Coca-Cola Company (NYSE/KO), Wells Fargo & Company (NYSE/WFC), and Microsoft Corporation (NASDAQ/MSFT).

To give you an idea, Apple, which carries a weight of a little higher than 4.5% on the S&P 500, was trending higher all year around, but recently it broke below the uptrend. If you look at the chart below, technical analysis would suggest that this move is certainly not in Apple’s favor. Apple’s stock has more weight on the S&P 500 than the material, telecom services, or utilities sectors. (Source: Standard & Poor’s, October 18, 2012.)

apple inc stock chart

Chart courtesy of www.StockCharts.com

If you look at the charts of the other S&P 500 companies that I mentioned earlier in this article, from a technical analysis perspective, you will find similar observations.

As I have been continuously writing, this earning season has been one of the worst I have seen in a long time. The S&P 500 looks to be stumbling. Economic conditions, earnings growth, revenue growth, and future expectations are not impressive. Sadly, things were looking better in mid-2009 than they are today.

Where the Market Stands; Where it’s Headed:

Why is it that some things never seem to be quite what they really are?

Back in 1987, three companies were included in the Dow Jones Industrial Average that are no longer there today: Bethlehem Steel Corp., Eastman Kodak Co., and General Motors Corp. What happened to these three companies? They all declared bankruptcy and were removed from the Dow Jones Industrial Average.

If I kept those three companies in the Dow Jones Industrial Average to compare apples to apples, the stock market, as measured by the Dow Jones from October 1987 to October 2012, would be a lot lower today than it is. And I thought just the employment numbers were fixed.

We are still in a bear market rally that started in March of 2009. That rally is getting old and tired, but the Fed is making sure it is kept alive.

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 started experiencing in 2008 long before anyone else.