Why the S&P Is Headed for 1,400

Already in 2011, we’re seeing a strong start to the market – the S&P 500 Index, for instance, is already up almost 5% this year, and other indexes are showing similar-sized performance. But that auspicious beginning to the year has more than a few investors wondering when the colossal rally that closed out 2010 will come to an end.

Don’t let that investor anxiety get to you, however. The market technicals are pointing toward continued bullishness in stocks, and 1,400 looks like the next stop for the S&P. Here’s everything you need to know to keep a cool head in 2011’s hot market…

As you know, as traders, predictions aren’t our game. That said, contingent expectations are our game – and one of those contingencies triggered last week, clearing the path for a straight shot to 1,400 for the S&P 500 and 13,000 for the Dow.

Take a look at the chart below – the annotations on which I haven’t changed for weeks (that’s crucial because it shows that the market is being obedient to our expectations). It shouldn’t come as a surprise that the S&P found support right on the top horizontal line we’ve been watching; it’s just another example of the market following our cues:

Last week, I told my Penny Momentum Trader readers that “If stocks sustain a break above 1300, expect rally mode; if the S&P falls below 1275, brace for selling.” And despite some flirtations around support at 1275 on Friday, the S&P 500 pushed definitively above 1300 on Wednesday, clearing the last overhead barrier between the major index and its next important resistance level at 1400.

So, now that stocks are in “rally mode,” what should you expect? For PMT’s small-cap trades, we watch the broad market purely for direction – when the S&P looks to rally, we’re long, and when it’s pulling back, we’re short. Simply put, we’re using power-packed small-cap stocks to trade the S&P’s broad trends (it’s a bit more complicated than that, but you can get the full story here…)

That means you can expect us to keep betting on stocks set to rise as we move deeper into February.

The Reluctant Bulls…

Meanwhile, some of the market’s most anxious investors are seeing the writing on the wall, and turning bullish. My colleague Greg Guenthner pointed me to news that noted hedge fund T2 Partners is reducing their short exposure and focusing instead on buying value stocks.

“Over time we’ve been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme…”

“Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them…” said Managing Partners Whitney Tilson and Glenn Tongue in their February letter to shareholders.

Added institutional buying pressures should back up our outlook at others follow T2′s lead…

At the end of the day, sentiment is a crucial element to the market’s movements – it’s human supply and demand that drives prices for stocks, after all. Don’t sweat the pullbacks; with sentiment barreling in bulls’ favor right now, and technicals showing few overhead price barriers, we’ll keep going long this market.

Sincerely,
Jonas Elmerraji
Penny Sleuth

February 10, 2011

Why the S&P Is Headed for 1,400 was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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