S&P 500 Failing to Rally Past Pre-Lehman Level Amid Technical Resistance

Restoring all the losses spurred by the bankruptcy of Lehman Brothers Holdings Inc. is testing the resolve of U.S. stock market bulls.

The Standard & Poor’s 500 Index rallied above 1,245 yesterday before paring its gains, failing for a second day to surpass the last closing level before Lehman Brothers collapsed in September 2008, data compiled by Bloomberg show.

Climbing above 1,251.70, its close on Sept. 12, 2008, may mean investors are growing confident the 21 percent rally since July 2 is sustainable, as companies report higher-than-estimated profits and the Federal Reserve attempts to boost the economy by buying bonds. The S&P 500, up 11 percent this year, exceeded the previous 2010 high of 1,217.28 reached in April and posted a combined gain of 13 percent in September and October.

“That’s obviously a critical level, that’s the level where we realized things were broken,” said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research, in a telephone interview from Cincinnati yesterday. “Now that we’re back up there, it makes sense the market takes a pause.”

The benchmark gauge rose as high as 1,246.59 at 2:21 p.m. yesterday before falling back to 1,238.17. The S&P 500 had a similar move on Dec. 13, reaching 1,246.73 at 2:46 p.m. before erasing all its gains in the last hour to mark the smallest daily gain since Oct. 26.

Today’s Trading

The S&P 500 touched 1,244.25 today before dropping to 1,235.23 as of 4 p.m. New York time.

On Sept. 15, 2008, the equity benchmark fell 4.7 percent, the steepest drop since the first day of trading after the Sept. 11, 2001, terrorist attacks, as Lehman Brothers’ bankruptcy and declining asset prices led investors to speculate that markets would freeze and the economic slowdown would worsen. Writedowns and credit related losses have totaled more than $1.8 trillion globally since the start of the financial crisis, and the S&P 500 fell as much as 57 percent from its peak in October 2007 through March 2009.

While the S&P 500 has rallied 84 percent since reaching a 12-year low in March of last year, unemployment at a quarter- century high at 9.8 percent has led some investors to remain cautious. Pacific Investment Management Co., manager of the world’s biggest bond fund, has warned since May 2009 that slower-than-normal economic recovery would hold returns below average levels. Equity funds have seen more than $80 billion in outflows since the start of May, according to the Washington- based Investment Company Institute.

European Crisis

The S&P 500 reached a 2010 low of 1,022.58 on July 2 amid increased speculation some European nations will be unable to repay their debt. Christopher Verrone, lead technical analyst at New York-based Strategas Research Partners, said a so-called head-and-shoulder chart pattern based on the lows of March 2009 and July means the S&P 500 will face resistance between 1,240 and 1,250.

“It’s purely technical moves,” Verrone said. The 1,251.70 Lehman level “has some psychological impact. It’s close to a round number -- 1,250 -- and people put emphasis on round-number resistance. It’s in the back of people’s minds.”

The head-and-shoulders pattern is formed by three consecutive peaks on a chart, the highest in the middle. The level that unites the troughs between the peaks is known as the neckline. In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

Breaking Through

The S&P 500 may also be pausing after a rally, according to Detrick. He predicts the benchmark measure will break through to close above 1,251.70 by the end of the year.

“We’ve had this big move and now we’re selling off late in the day, but it doesn’t appear it’s big institutions dumping a lot of the shares,” Detrick said. “That’s an encouraging sign for the bulls. It’s simply that the market’s catching its breath.”

The S&P 500 has gained an average of 1.9 percent during the last 10 trading days of the year, according to Bespoke Investment Group data going back to 1990. While there are 12 trading days remaining in 2010, such a gain would push the benchmark gauge to 1,265.18 from yesterday’s close, above the pre-Lehman level.

“You’re seeing a change in trend in the daily market moves,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, who helps manage $240 billion. For the rest of the year, the S&P 500 will “recoup and rebuild itself for another rally into the first part of next year.”

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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