The Active Index Strategist

August 03, 2004


Founder and editor-in-chief Steven Schoenfeld's Active Index Strategist column is a regular feature on the site. More information about the column, and about Steven Schoenfeld, including links to other columns and to the website for his just published book, Active Index Investing, follows the article..

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I am going to focus only on the U.S. stock market for this column, as I believe that it is at a critical level. The key benchmark indexes, which underlie the most popular ETFs can provide insight into the overall market direction.

Since the day after the June 30th interest rate hike, U.S. stocks have been in a downdraft, and in the week after Independence Day, major chartpoints on the main indexes have been broken.

As I noted at the time in my column for, the violation of 1120 in the S&P 500 Index and the more recent probe of 1375 in the Nasdaq 100 Index (which the QQQ ETF tracks) has been a confirmation for me that we are seeing the end of the U.S. equity bull run that started in Spring 2003. The S&P 500 broke below 1120 on July 6th, and has failed to recover this level, and my next downward target of the May lows of 1090 to 1080 were penetrated as well, confirming a bearish environment where the 'burden of proof' is on the bulls.

I believe that short positions in SPY or IVV for the S&P 500 and the QQQ for the Nasdaq 100 are likely to be the favored position for the medium term. Despite favorable earnings announcements in July, the market seems to be quite 'heavy,' and a mixed bag of economic statistics and geopolitical news has not been helping. On the technical front, both the S&P 500 and the Nasdaq 100 (and Nasdaq Composite and Russell 2000) are below their 200 day moving averages, which confirms a bearish trend

In the S&P 500, the key support is now 1080 (equivalent to $108 in the SPY and IVV). If this level breaks - as I expect it will - the next support level is at 1020 (or $102 for the ETFs), but this would be minor support, with major support only at the 960-980 level. This implies a 12-15% drop in this key index.

While the Nasdaq 100 is still above this key support, its technicals have deteriorated sharply, and most indicators point to further losses, with the 1375 level (corresponding to $34.00 in the QQQ) unlikely to hold. Like the S&P 500, I don't expect this key support to hold, and if/when it breaks, the minimum downside objective is 1150, with 1100 as the probable final objective. This translates into a drop of 17-20%, with a QQQ-equivalent target of $30 (at minimum) with $28 as probable. So watch out below.

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I stand by my other recommendation from the previous column, namely, that if you're not boldly bearish enough to go outright short the SPY or QQQ, you might consider a spread trade. You could short QQQ against a long position in either a high yield equity play such as the iShares Dow Jones Select Dividend Index Fund (ticker: DVY ), or short QQQ against LQD (an asset allocation trade that will earn you over 4% yield before capital gains/losses).

Another spread trade idea would be to short the technology sector versus a long in the energy sector. For example, one could short the Sector SPDR Technology (XLK) versus a long in the Sector SPDR Energy ETF (XLE), or within the iShares complex, one could short IYW (Dow Jones US Technology Index Fund) versus IYE (DJ US Energy Index Fund)

I hope that some of these insights of value to your investment strategy. 'Til the next column…

Steven A. Schoenfeld is the Founder and Editor-in-Chief of and a Managing Partner at Global Index Strategies LLC. His book Active Index Investing - which features more than 50 contributors from across the indexing world - was just published by Wiley Finance. More info on the book can be found at Steven's bio and links to other columns follow...


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