Im going to post up some of my theories and charts. Read what I post then respond back accordingly. I'll post up a few charts or theories per week as to what I am seeing on the S&P 500. The purpose is to gather opinions and create discussion.
Margin Debt Theory Theory: Price is relative to the amount of margin debt on the market. The greater the debt, the higher price will be able to go. http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tables&key=50&category=8 Margin debt for January just released and its at about 177. I'll give some approximations in regards to price and debt. January 2009 Debt=177 NYSE comp= 5100-5700 July 2004 Debt=177 NYSE comp= 6300-6500 May 2001 Debt=174 NYSE comp= 6700-6900 May 1999 Debt=177 NYSE comp= 6500-6700 Notice how in 1999, 2001 and 2004 debt was at comparable levels in regards to price. In the current times, price is lower with similiar debt. This tells me that more margin is required to prop the markets up and there is less real cash out there then before. These times are definately different then the past. Using a simple proportion, I came up with the following: (assumption is that margin debt will revisit previous lows and go no lower) (5476(average of all closes on the NYSE in January)*130(margin debt of Aug/Sept 2002))/177= $4021 If this proportion works out correctly, then at a debt of 130 the price of the NYSE comp will be $4021. ($4021/$4284)X683.38=641.42=the bottom (assuming that the S&P500 trade comparingly to the NYSE comp) This is assuming that the margin debt will go no lower then the old lows... Here is a chart I created a few months back in regards to margin debt. You can see where there might be obvious support at the 130 level. If this was a stock chart, then you could imagine price stopping at the 130 level and then staging a rally from there. Finally, here is the chart of the NYSE comp for part of the period covered in the margin debt chart. BTW, debt is now below that diagonal support line slightly suggesting that debt is now in a free-fall to the 130 level. Im not certain exactly which day during any given month the debt is measured or the methodology so there are other variables not factored in to all of the above.