Is the S&P 500 Heading for a Third Peak?

By George Leong for Investment Contrarians | Aug 8, 2012

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The S&P 500 topped 1,400 on Tuesday for the first time since May 3. The upward move was also the fourth top above 1,400 since 2008. In January, my stock analysis estimated the S&P 500 could test 1,400 this year, so the upward move has come a bit early.

Some in the media are even whispering about 1,500, but the last time the index was at this level was in October 2007 at the historical high.

The word “overextended” comes to mind at this juncture, based on my stock analysis. The fact is that since the amazing climb of the S&P 500 from 1995 to 2000, the index peaked on two separate occasions in 2000 and 2007, at above 1,400 and 1,500. And my stock analysis is looking at whether the current run-up from 2009 is sustainable and whether the index is heading for its third peak since 2000. You cannot tell at this moment, but, as the S&P 500 edges towards 1,561 (last achieved on October 8, 2007), it should become clearer, based on my stock analysis.

That high point may be tested in 2013 if the S&P 500 can rally another 11.5% from the 1,400 level. Again, it will be interesting to see if the index can break higher to a record high.

I’m not even convinced 1,400 will hold by the year-end, based on my stock analysis.

Following the break at 1,400 in March, the S&P 500 retrenched and failed to hold on two subsequent attempts at 1,400 in late April and early May.

The reality is the market is betting on a resolution and calm returning to the eurozone. Spain will likely require a full bailout when it makes a formal request, and Italy just reported its fourth straight quarter of contraction. Nothing will be easy, and I expect more hardship.

In addition, the relatively light trading volume doesn’t support a strong sustained move, as the support is weak. This is worrisome and could indicate a market correction may be in the works.

On the extreme end, the S&P 500 could decline down to 1,180 by the year-end, according to research by the Financial Forecast Center (FFC). Of course, the forecast is off, as the FFC initially predicted 1,300 to be broken by the end of August, as shown in the graph.

Chart © Lombardi Publishing, 2012

In my stock analysis, the market will need leadership to have any chance of advancing higher. The technology and bank stocks are looking more positive and could drive some buying, but, based on my stock analysis, a lot more will be needed to reach 1,500 for the S&P 500.

I doubt the S&P 500 will head that much higher this year, having already advanced nearly 11%. That is, of course, unless China’s GDP surges, jobs and housing start to sizzle in the U.S., and Europe sees strong GDP growth.

Tags: bank stocks, China, Europe, GDP growth, market correction, S&P 500, stock analysis