S&P 500 at 1,000?

After an embarrassing and quite disastrous meeting of European Finance Ministers last weekend, all hopes were hanging on the Federal Open Market Committee meeting and the well anticipated launch of “Operation Twist”.

Yet, the outright downbeat assessment issued by Fed Chairman Ben Bernanke poured cold water on a market that was still hoping for a re-acceleration of growth after the summer in a repeat of what happened last year.

We are therefore left with a potentially crumbling European financial system with a backdrop of sharply heightened downside risk on global growth.

On the bright side, it must be noted that after falling off a cliff from February 2011, the Citigroup Economic Surprise Index for the U.S. is slowly recovering:

Citigroup US Economic Surprise Index – source: Bloomberg

This is of course a function of sharp downward revisions to expectations after a disastrous year on the economic front. This remains a factor to watch however.

The crux of the argument remains that the slow death scenario in Europe has to be addressed as an emergency but after the EcoFin meeting we fail to see a sense of unity of purpose in the European Community.

Of course, announcements over the coming weekend might still happen although the probability remains fairly low. Greece of course springs to the top of minds in this respect.

The European Central Bank also stands ready to cut rates in an emergency and there is no doubt that it will do so if we experience another bout of stress next week. But one has to wonder what good this would bring for the fundamental issues that plague Europe right now. Not much more than a very temporary relief on the announcement, in our view.

Clearly, the technical picture on both sides of the Atlantic calls for sharp downward moves in the near future.

At the time of writing, the S&P 500 futures look to be headed for a slight pullback, having avoided an outright bearish close overnight:

S&P 500 Dec. 11 futures contract – daily chart – source: Bloomberg

Still, we would not expect the rebound to exceed 1,150/60 at the very best before the downtrend resumes.

Indeed, the volatility index for the S&P 500 paints a bleak picture as the fear index breaks out of a consolidation pattern. This could open the way for much more upside for the “fear” index:

S&P 500 Volatility Index – source: Bloomberg

Last night’s break to the upside may well be heralding a sharper downward move in equities within a short period of time.

Looking at the weekly chart of the S&P 500 weekly chart, the picture is also bleak: 

S&P 500 cash index – weekly chart – source: Bloomberg

Indeed, the cash index is on course to print a bearish weekly engulfing pattern that would put an end to what had all the attributes of a suckers’ rally. The Friday close will be highly informative in this respect.

On balance, and unless we get a significant announcement from the Europeans over the coming weekend, we expect to see U.S. and European markets much weaker next week and the area of 1,050-1,000 looks like a realistic target.

In Europe, the technical picture looks even heavier for obvious reasons and the mooted reaction to the upside we are seeing this Friday morning is not encouraging.

The congestion area we highlighted in previous posts was met with heavy selling activity and real money accounts have been bailing out all week.

DAX 30 cash index – daily chart – source: Bloomberg

The “double-bottom” formation is therefore the line in the sand for a sharp move lower.

In conclusion, bar an unlikely surprise announcement from the European side, the downside risk remains wide opened.

Hang on to your hats!