Stock Market: This Chart Shows Why the Bulls Are Delusional
As a trader, I’m pretty neutral on the stock market at this juncture and believe there are numerous hurdles to override before we can get to the “Promised Land,” which I thought would be around 2,200 for the S&P 500 at the start of the year. But I’m well off unless something dramatic occurs to give the stock market a much-needed lift off.
The stock market saw some positive technical developments on the price charts over the past two weeks, which I will explain.
I’m not turning bullish at this point, but if you listened to John Stoltzfus, the chief market strategist at Oppenheimer Asset Management, in an interview on CNBC last Friday, he believes the S&P 500 could jump to 2,300 by the year-end. By his calculation, there is 17.5% upside potential in the broad market measure.
Now, before you wonder how he arrived at his forecast, this is the same guy who, back in September 2015, said the S&P 500 would trade at 2,311 by the end of 2015.
Stoltzfus clearly favors the 2,300 target. Now, it could happen, but I highly doubt it given the China risk, oil weakness, interest rates, and the fact that corporate America is caught in a period of revenue contraction and muted earnings growth.
For the index to be able to jettison to 2,300, you would need price-multiple expansion from the current 15X or for earnings to surge. I doubt either will happen this year.
Chart Courtesy of www.StockCharts.com
Chart Support May Be Emerging
There have been some positive technical signs surfacing over the past two weeks that may indicate a near-term market bottom—not 2,300.
I’m not even convinced my initial 2,200 target representing a 12.8% upside move will materialize. Perhaps more like 2,100 in the best-case scenario.
The S&P 500 showed decent technical strength when the index fell to 1,810 on February 11 and subsequently rallied 8.7% thereafter. The fact the index has recovered a key technical point at 1,940 in the past few sessions is bullish in the near term.
The hope now is that the S&P 500 could take out 1,975 and eventually test the physiological 2,000-point level for the first time since January 6.
My thinking is that the direction of oil prices will be the key for the S&P 500 when it comes to whether it can break higher and capture its 2015 highs.
The April WTI oil traded above $33.00 on Friday despite Baker Hughes announcing that the operating oil rig count fell again to 400 for the most recent week. The number keeps getting smaller, down a whopping 70% from the same time last year.
With oil demand struggling to stay afloat and an oversupply in world oil production and storage, oil prices really have limited upside potential. The current rally, after declines to the 20 handle, is clearly driven by oil futures trading and headlines.
My Thinking Going Forward
Assuming oil prices stay at the sub-$40.00 level, I doubt the S&P 500 can trade up to 2,300 this year or even next if oil doesn’t find legs.
As to John Stoltzfus, I think he may have to readjust his timeframe for the S&P 500 to reach 2,300 to sometime in 2017.
However, while buy-and-hold investing is not paying off, aggressive stock and option traders could make some quick gains especially if the selling is excessive. Option traders should look at the near-term expires to trade.
