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

Why I Believe the S&P 500 Rally Since
March of 2009 Has Been a Fake

Tuesday, November 13th, 2012
By for Profit Confidential

the S&P 500 Rally Since March of 2009 Has Been a FakeThe S&P 500 is still trading in dangerous territory. Looking at it from a technical analysis point of view, there is not a lot of bullish sentiment on the chart.

Since this past June, the S&P 500 traded higher and higher…continuing to buck the trend to the upside. In mid-September, it made new highs and, from there, the S&P 500 has been in a continuous slide. It broke its uptrend, moved below its 50-day moving average (MA), and made lower highs.

 spx stock market chart

Chart courtesy of www.StockCharts.com

On November 7, 2012, the S&P 500 fell below 1.400, its major support.

Likewise, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is showing extremely bearish sentiment towards the S&P 500. The VIX was trading in a downtrend, and broke to the upside—not a great sign for a stock market rally.

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I have been harping in these pages for some time now about the VIX—it is suggesting that the risk in the S&P 500 is piling up very quickly. Since the beginning of October, the S&P 500 volatility index has risen almost 33%.

vix stock market chart

Chart courtesy of www.StockCharts.com

Looking beyond technical analysis, so far, 350 companies of the S&P 500 index have reported their third-quarter earnings. Only 40% of the companies reported sales above the estimates. At the end of earnings season, if the ratio of S&P 500 companies reporting sales above the estimates stays the same, it will mark the worst quarter for revenue growth for the S&P 500 companies since the first quarter of 2009. (Source: FactSet, November 2, 2012.)

To add to the earnings chaos, more and more S&P 500 companies are providing negative guidance about their fourth-quarter earnings. So far, 56 companies have provided negative guidance compared to only 18 with positive guidance!

The most basic ingredient of a solid stock market rally is companies reporting positive earnings and revenue growth. This has stopped happening for several reasons. The reality of the economic situation in Europe, the quickly slowing Chinese economy, and the fragile American economy are putting pressure on the financial performance of companies.

I’ve been saying this for months now: Artificially low interest rates and money printing do not correct the structural imbalances of an economy. This whole stock market rally since March of 2009 has been built on the Federal Reserve increasing the money supply, the government borrowing like mad, and interest rates being set at record lows. That’s why I believe the stock market rally has simply been a fake, conjured up by a bear whose sole purpose is to lure investors back into the stock market, so he can take their money away one more time.

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March of 2009 Has Been a Fake
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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