Technical Analyst Walter Zimmermann's S&P 500 Chart Projects Low of 540 in 2016! Market Overbullish and Overbought In Near-Term

Oh, the S&P 500 is making new highs? Well guess what, according to Walter Zimmermann, senior technical analyst at United-ICAP, not only is the S&P overbought and overbullish in the near-term (74% of money managers were bullish in Barron's recent sentiment survey, a new record), he expects the S&P to bottom at 400 in 2016. Zimmermann's chart targets 540 on the S&P in 2016 as the "final E wave down" (see below). I'm not sure how he came up with 400. My chart says it bottoms between 530 and 570 between 2016-2019. He was interviewed on BNN on April 24 and put up a few charts on BNN's website (S&P 500 trend lines, "sell by May and then go away" historical statistics, U of M consumer sentiment, and real vs. nominal S&P charts). I charted out the S&P, Dow, and NYSE as well using the same trend lines.

Here is Walter Zimmermann's views on the real vs. nominal stock market illusion, current market euphoria, and the consumer sentiment divergence (I put up that chart as well courtesy of United-ICAP via BNN.ca).

source: BNN.ca
"That brings up the question, well, is this the start of a sustainable recovery or is this a bubble? And what characterizes a bubble, well, there are a number of things. One is that the nominal stock market gets way way way ahead of the real inflation adjusted stock market. And as it currently is situated, the nominal S&P, not adjusted for inflation, is the highest it's ever been above the real inflation adjusted S&P. That gap we call a bubble. And the last time we had a gap anything that large was back in 2007, when the housing bubble bursting hit the stock market. And we all know what happens when bubbles burst. The other thing to note about bubbles is they are largely invisible until they burst, and then everybody notices them because everybody is caught long.

Now, that gets into the issue of sentiment. And if you look to this weeks Barron's cover story, the headline being "Dow 16,000," if you read the story you find that there are more money managers bullish now than ever. By a wide margin. There have never been this many people bullish on the stock market. And not just a year ahead, but 5 years ahead. 94% are bullish. These are extraordinary numbers. We've never seen anything like this before."

Source: BNN, United-ICAP/William Zimmermann

Source: BNN, United-ICAP/William Zimmermann

More on the bullish money manager sentiment via the Barron's article "Dow 16,000" (emphasis mine):

"The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years. What's more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year, notwithstanding a dismal week of selling that left the blue-chip index at 14,547.51 on Friday.

A quick trip through history reveals that only 45% of managers were bullish in the spring of 1999, and 54% in the fall of that year, even as the dot-com boom was inflating. Similarly, bullish sentiment was in the mid-40% range in the mid-2000s, as the housing market was on the boil and stocks last were hitting fresh peaks."

Here's my chart of the S&P 500 going out to 2019.

source: StockCharts.com

When using the same trend lines, the Dow Jones Industrial Average is projected to bottom between 5,400 and 5,770 between 2016 and 2019. This means that the Dow will revert back to 1996 levels. The way I see it, human and robot traders would leverage up all of the new printed money and sell the market short. And perhaps long-only money would capitulate hard to the downside when (or really if) the previous lows break.

source: StockCharts.com

Here is the NYSE Composite Index.

source: StockCharts.com

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