The key level of support of 1200 on the S&P 500, the intraday low from July 15th, was breached today with the S&P closing at 1193 (S&P 6 Month Chart).
This is important because a lot of traders and investors watch these levels to get a feel for how other investors are feeling and how the market is likely to trade. When support holds, they feel like maybe a short term bottom has been put in place. When it fails, the bias is to expect markets to continue moving lower.
To the average investor, closing 7 points below 1200 might not seem like a big deal. But it is a big deal. That means a lot of investors didn’t want to hold stocks, even at what was presumably support. That means they believe that the support is not reliable. My own feeling is that this is not yet a short term bottom. We’re going even lower in the near term.
The Fear Index (VIX) spiked up almost 24% today to close around 32. All five of the major short term bottoms during this bear market (Aug 16 2007, Nov 12 2007, Jan 22-23 2008, March 17 2008 and July 15 2008) have coincided with spikes in the VIX above 30. That suggests were getting close to some kind of short term bottom.
My overall feeling, however, is that this could be the start of another big leg down. The recent short term bottoms in July and March didn’t take us much below the previous lows from January. But the January low, which was really an inflection point as sentiment shifted massively towards there being a bear market/recession, took us well below previous support. I think this move could be more like that one.
To speculate a little, I think the financials could make one final, panic stricken lurch lower, testing and even breaking the current low of this bear of $16.77 on the XLF (the XLF closed today at $19.09). At that point, the financials will have put in THE low for this bear market and that will be something significant.
At this point, the S&P has given back half of the gains from the bull market. The bull market took the S&P from around 800 in July/October 2002 to around 1600 in July/October 2007. At around 1200 today, that’s a 50% give back. As I wouldn’t expect the S&P to trade all the way back down to 800, or even approach that level, one positive thing is that most of the damage has already been done. Even if the S&P trades all the way back down to 1000, 400 of that 600 point descent has already been made.