For two months, the bulls and bears fought a battle between 1230 and 1120 on the S&P 500 before briefly breaking to new lows on October 4th. After an amazing short covering rally that has taken the price level back to 1230, resistance is being met once again. The chart below is the price chart of the S&P 500 Year to Date, and the resistance line I mentioned is marked off by the red line. Now, the most likely path of least resistance is down and could easily fall back to 1120.
The selling comes as no surprise to the Pinnacle Investment team. Greece will still default, the U.S. is looking as though a recession is inevitable, and the Chinese economy is running out of steam. These factors led us to reduce risk in the portfolios. We sold the break below 1100, and much to our chagrin, we were punished in the short term. And at the end of last week, we sold again at the much more favorable price of 1220.
After these trades, our portfolios are now running at 50% of benchmark risk. If the market continues to rise through year end, we will not be able to keep up with the benchmark returns. It is therefore vitally important to watch the technical levels, as a break above 1230 would be considered very bullish. To the downside, first up is 1200 (buyers and sellers love whole numbers), and then the 1120 level I mentioned previously. Let the battle continue.
