Is 1120 the next big test for the S&P 500?

09/21/2009 9:07 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The Dow Jones Industrial Average is closing in on 10,000 again and you can expect the financial talking heads to get all breathless as we approach that mark.

But for investors the index to watch and the number to watch in the next few weeks is the Standard & Poor's 500 and 1120.

The S&P 500 is now at it's highest level in 11 months and it recently broke above 1000. (It closed at 1068 on Friday, September 18.)

Will it keep going? The way it responds to the challenge of 1120 will tell us a great deal about the short run prospects for the current rally.

Why is 1120 so important? Rallies that follow a big downturn in the market often fail--or at least take a rest--after they've retraced 38% or 50% or 66% of the loss. Those kinds of gains off the bottom, history suggests, are enough to lead investors, nervous after the beating they took in the downturn, to lock in profits from the rally by selling.

This rally has already met the first test by moving up to and they beyond the 38% level. That puts the test next at 1120, which represents a 50% retracement of the total decline in this bear market.

There's another reason to think that 1120 will be important. This test will take place at a critical moment on the calendar.

 In recent weeks money moving back into the market from the sidelines has been an important  factor in fueling this rally. A significant source of that new money has been money managers who have missed this rally trying to put more money to work before they have to report end of the year portfolios to their investors. The last thing that they want to report is that their returns lagged the stock market indexes and that they're still sitting on big cash positions.

At some point though it becomes too late to buy to achieve any significant window dressing for your portfolio because the books have closed for the year. For many managers their fiscal year ends on October 31 and any investments intended to dress up their portfolios have to be completed by then.

That means the technical test of 1120 and the ticking clock for money managers are on roughly similar time tables. The question will be Can the index move up so strongly on the last gasp of window dressing to create enough momentum to convince investors that they have to keep chasing rising prices into November?

An alternative scenario would see selling by money managers who have dressed up their portfolios for end of the fiscal year reporting and who now want to cut their risk or lock in profits.

The trend of the market is still upward but 1120 is only about 5% from here. The risk is rising and the reward isn't especially attractive here. No reason to run for the hills but not a time to be making big bets either.

I've made a number of buys (and one sell) in recent weeks but the Jubak's Picks portfolio is still about 30% in cash.

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