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S&P 500: Will history repeat itself?

After a drop at the end on May that sent the S&P 500 back to December 2011 highs, the index has moved upwards and is currently trading in a tight range between 1.330-1.375. With the US economy continuing to weaken, corporate earnings showing strong signs of strains and the Eurozone debt crisis still ranging, the risk is clearly on the downside. Despite the fact that investors are looking for glimmers of hope, mainly waiting for the arrival of the next round of quantitative easing, it is rather unlikely that the central bank will intervene in the near term, leaving the market at risk of a further correction. If we take into consideration what happened last summer, there are quite a few similarities. In both cases the market rallied in June, following a May decline, leading to sloppy sideways trading in July. The major sell signal was triggered on August 4th of 2011, when the market started a free fall. With the current fundamental and technical setup showing a downward trending market, the S&P 500 could soon re-test June lows at the 1.273 area, if not set new lows in August. Should those lows coincide with further weakness in the economy, that would provide the ground for the Fed to launch a third QE. If, however, the Fed acts earlier, we should consider adding equity exposure back into the portfolios.
S&P Daily Charts


Dafni Serdari
Market Analyst
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