The S&P 500 index closed on Friday June 27, 2008 at $1278.38. The S&P 500 is arguably the most widely accepted gauge of the market in the US. It includes 500 ‘blue chip’, large cap stocks, which together represent about 75% of the total U.S. equities market. Companies eligible for addition to the S&P 500 have a market capitalization in excess of US$5 billion. Refer to www.standardandpoors.com for a more detailed description.

The high for the S&P index over the last year was $1576.09 on October 11, 2007 and the low was $1256.98 reached on March 17, 2008. From the peak (high) to the trough (low) that represents a drop of –17.6% for the S&P 500 index vs. the TSX, which was down at -9% over that same time frame. Year-to-date the S&P 500 is down over 12% if you measure from December 31, 2007 close to June 27, 2008. The TSX is up about 3% over the same period.

The chart is telling us that investors are bearish toward the S&P 500. From May 20, 2008 to date there has been a downward channel illustrated by the upper and lower trend lines on the chart. Prior to this period, the chart shows the short-term bullish trend that started on March 17, 2008 represented by the trend lines showing an upward channel. This short-term bullish trend reversed itself on May 20, 2008. The current price crossed the 50-day moving average on June 9th, 2008 and since then the current price has stayed below this mark. The next support level is $1256.98, which is the rolling 52-week low. Watch this to see if the S&P falls below or bounces off.

Fundamentally, we have a lot of negative news coming out of the US decreasing house prices, continued write-downs of assets tied to subprime mortgages, slower earnings in most sectors, increasing food and energy costs and a weakening US dollar. “While stock prices have fallen this year, shares still are not all that cheap by historical standards. On Friday, the 500 stocks in the S&P 500 traded at an average of 21.2 times those companies’ earnings per share. Since 1990, that price-earnings ratio has averaged 24.3.” Battered by Oil, Dow Touches Bear Territory By MICHAEL M. GRYNBAUM in The New York Times

Ultimately earnings drive stock prices and earnings are slowing in most sectors. The latest concern is ‘stagflation’ which is slowing growth in the economy combined with inflation. In an interview on Bloomberg Television last week Warren Buffet expressed his concern saying, “I think the ‘flation’ part will heat up and I think the ‘stag’ part will get worse.” This begs the question will the Federal Reserve fight inflation by raising rates or support growth by lowering rates or leaving them unchanged? A good read on this subject is John Mauldin’s article written last week entitled “Another slow motion recession revisited”. It is accessible in www.frontlinethoughts.com.

Both the technicals and fundamentals say plunge.