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A Sell Sign from the S&P 500?

The Standard & Poor’s 500-stock index closed above 1,114 yesterday, and Evergreen Investments chief market analyst John K. Lynch is waiting for the benchmark his 1,120. What’s so special about that level? Lynch says 1,120 represents a 50% retracement. That is, the S&P 500 fell to 676 in March from the October 2007 peak of 1576. So 1,120 is about the half-way back marker.

History has shown that initial resistance to crossing a marker—the S&P 500 has been within 2% of the 1,120 level for more than a month now—can quickly be replaced with support. Similar to how quickly the market fell from 1200 to 900 last year, the same goes for the upside. Meaning if we reach 1,120, 1,200 won’t be far behind, say Lynch. Especially given the amount of cash on the sidelines.

But investors who missed the runup shouldn’t throw everything in now. “With a 10% unemployment rate and the likely chance the Federal Reserve will raise rates, I think 1200 is as good as it gets,” says Lynch. He thinks that at that point, investors should be prepared for a pullback to about 1000.

Lynch explains that the best thing individuals can do in the meantime is to make sure their portfolios are fully diversified. “Don’t wait until the end of the year to rebalance,” he says.

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