Bulls have struggled to keep the ball rolling during the past couple of days of uninspiring news. After Monday's ISM data showed strength in the manufacturing sector, the S&P 500 hit another 52-week high, before selling set in for Tuesday-Wednesday. It seems the hawkish tone of the FOMC meeting minutes coupled with tepid demand for the latest Spanish debt offering was just a bit more than bulls could overcome. Like we saw with Greece's debt situation, global investors have serious doubts that Spain has the fortitude to sustain the necessary fiscal reform.
Nevertheless, round-number resistance-turned-support levels at 13,000 on the Dow, 3000 on the Nasdaq, and 1400 on the S&P 500 have held up through Wednesday, although the S&P 500 closed slightly below support. The S&P 500 index has fallen eight of the past twelve sessions, and the Nasdaq posted its worst daily percentage decline for 2012. Nine of the 10 sector iShares are lower for the first three days of the week, with Materials (IYM) and Energy (IYE) the weakest and defensive sector Utilities (IDU) the only one staying positive.
The "junk rally" phase that the market has reached generally precedes a significant pullback to remind investors about the importance of quality when choosing a good stock investment. In fact, I think bulls are eager for a bigger pullback to occur as a much needed retest of key support levels from which to build a foundation…and to put more cash to work at lower prices.
The first quarter of 2012 closed with stocks achieving their strongest quarterly gains since 1998. The S&P 500 was up 12%. Utilities, which was the best performing sector during 2011, was the worst performer for 1Q2012. Financials and Technology were the quarter's best performers. Tech was led by Apple (AAPL), of course, which was up an amazing 48%–accounting for more than a third of the S&P 500's gain for the quarter.
Looking at the SPY chart, it closed Wednesday at 139.86, which is just below the 140 resistance-turned-support level. It is testing support at the near-term uptrend line (since late December). Below that, there is support from the longer-term uptrend line around 137. RSI, MACD, and Slow Stochastic all have a ways to go to work off overbought conditions and cycle back down to oversold.
The VIX (CBOE Market Volatility Index—a.k.a. "fear gauge") closed Wednesday at 16.44, which is still well below the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 40 bps, where it has held flat since mid-February. This appears to be the level or credit risk at which investors are comfortable.
With yields so low, Treasuries remain overvalued. For yields to rise prices have to fall, which means selling—and the likely transfer of capital into equities and other risk assets. So, if Europe can hold things together, and if the impending earnings season is reasonably encouraging, there's no reason that the growing legions of bulls can't take the S&P 500 to 1500 within the next several months.