Why I Believe the S&P 500 Could Fall to 800

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By Investment Contrarians

It’s that time again. As we move into the always interesting month of October and fourth quarter, I expect some surprises are in store for us in the stock market, as was the case in previous years. The big difference is that the stock market has already made some strong gains, so the upside in the last quarter is debatable, given the slew of market uncertainties surrounding us. 

There’s the debt ceiling deadline today, the third-quarter earnings reporting season, the Fed’s tapering, and Black Friday, an important holiday shopping season. 

For stocks to move higher, we need some major evidence the economy and corporate America are healthy. So far, it has been merely decent, but clearly not deserving of the stock market rally. 

We are into the fifth year of the current bull stock market, so there are reasons to be concerned. 

The chart of the S&P 500 shows the sideways channel established since 2000. We had market tops in 2000 and late 2007, prior to the subprime crisis and recession in 2008. 

Now, here we sit at another key economic crux, but the S&P 500 is still on a breakout; albeit, its staying power is still questionable. The fact that we are in the fifth year of this rally makes me nervous, based on my technical analysis.

Chart courtesy of www.StockCharts.com 

Also take a look at the declining volume that accompanied this rally since 2009. In the previous five-year rally, from 2003 to 2007, the trading volume on the S&P 500 trended higher. My feeling is that there’s a lack of mass market participation in the current rally, which means a lack of support. 

If you really sit back and think about it, looking at the chart, you get a sense a major downtrend in the stock market is on the horizon. Considering all of the market risks, it’s really not difficult to believe the stock market is due for a downdraft. 

The positive is that a stock market correction usually doesn’t last too long and during that time, there will be good buying opportunities to enter into the market. The downtrend following the 1997–1999 rally lasted three years. After the 2003–2007 rally, the downtrend lasted just over a year, as the government and Federal Reserve pumped trillions into the economy to avert a possible depression. 

The chart below of the number of stocks on the S&P 500 above their 200-day moving average (MA) shows a rebound to 82% from the low of 75% in late August, though it remains much lower than the 94% reading in late May.


Chart courtesy of www.StockCharts.com 

My advice to you at this point is to take some money off the table, as the stock market may be hitting a snag and is ready to pull back as it did following the previous bull markets. 

If this happens, a move down by the S&P 500 towards long-term support at around 800 could be possible, but it would also provide some excellent buying opportunities.

by George Leong, B.Comm. 

This article was originally published at Investment Contrarians

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