Monday, December 12, 2011

S&P 500 Expected Weekly Range 1,204 to 1,306

The S&P 500 expected volatility has decreased slightly to +/- 4.05% from 4.13% for the week or an expected trading range of 1,204 to 1,306 as indicated in Chart 2 below.  The long term sentiment signal (Chart 1 below) still indicates that we remain in a "Tentative Buy" period.  Therefore, a price drop below 1204 (or -4.05%) indicates a buy opportunity. The long term sentiment signal (green line) has steadily improved and it is about to cross the first confirmation signal line indicating that we move from a "Tentative Buy" period to a "Buy" period.   However, the "Super Signal" is steadily approaching zero (although showing slight improvement this week) and will likely form around the same level as 2008 if the trend continues.  For now though, the "Sentiment Signal" supersedes the "Super Signal".  If the "Super Signal" forms it does not indicate a time to panic.  It just indicates that it will be time to start making incremental adjustments away from equity positions into shorter term investments.  As you can see in chart 3 below, in 2008 the market rose for a period of one to two months after the Super Signal formed providing opportunity to exit before the crash.

Sunday, December 4, 2011

S&P 500 "Super Signal" Formation Jan-2012


Last week the S&P 500 surprised many by posting a 7.39% gain closing at 1,244.28.  It closed above the expected trading range of 1,110.49 to 1,206.85 (as indicated in Chart 2 below).  Although we remain in a "Tentative Buy Period", as indicated by the "Sentiment Chart" (Chart 1 below) there were no buy opportunities  last week since the markets closed up or above the expected trading range every single day (for further explanation see Investment Strategy Page).  However, I am growing concerned by the trend towards the formation of a "Super Signal" (see chart 3 below).  The increased volatility of the market, with the expected weekly range now above +/-4%, adds further credence to these concerns.

Sunday, November 27, 2011

Black Friday Sales Jump 16.4% As European Debt Burns

According to Reuters, "U.S. retailers racked up $52.4 billion in sales during the Black Friday weekend, a 16.4 percent jump from a year earlier." This is a strong showing from the retail sector.  This performance may boost the S&P 500 this week.  However, this move will likely be tempered by investor concern over European bond rates; with Italy's two-year yields above eight percent on Friday.  This weeks S&P 500 expected trading range is between 1,110 and 1,207 (see chart 3 below).  A move below 1110 at any time during the week triggers a "Tentative Buy" opportunity.  

Sunday, November 20, 2011

S&P 500 Still Indicates Tentative Buy

Over the last three weeks the S&;P 500 has plodded along the 200 day SMA.  However, on Friday it closed at 1215.65  (a 3.81% decline for the week) which, if you recall, is below the target (1216.75) that I set as indication of a significant weekly market move (or buy opportunity).  Based on weakness in the intermediate signal (blue line in chart below) it still appears that the market will decline further, but long term it is still indicating that we are in a "Tentative Buy Period" (see Oracole Investment Strategy). The new target indicator for a significant buy opportunity will be a drop below 1168.25 (or a 3.90% drop on any given day).  The only thing that is worrisome to me is that the slope of the 200 day SMA has become negative. 

Sunday, November 13, 2011

S&P 500 Signals Tentative Buy

Last week I stated that it appeared from the market senitiment signal in Chart 1 below that the market was set to decline over the next few weeks.  However, the long term sentiment signal line (green) continues to approach the first confirmation signal and the intermediate signal (blue) has reversed direction slightly and still remains above its confirmation line (pink).  Due to this shift in the intermediate signal it is difficult to say which direction the market is headed, but the market remains in a tentative buy period  and a decline below 1,216.75 (or a decline approaching 3.73% or greater on any day) this week should be considered a signifcant "Tentative Buy" opportunity (Oracole 401K Investment Strategy).  Also the "Super Signal" (Chart 2) is still indicating that it is safe to buy (see chart 2 below).

Sunday, November 6, 2011

S&P 500 Set For Intermediate Decline

It appears from the market senitiment signal chart below that the market is set to decline.  The intermediate signal (blue signal line) has peaked and is declining.  This indicates that there should be some "Tentative Buy" (Oracole 401K Investment Strategy) opportunities over the next few weeks to come.  I see a decline below 1,206 (or a 3.75% decline) this week as a signifcant "Tentative Buy" opportunity. The slope of the long term signal line (green) is positive, but it has not yet fully confirmed.  However, the "Super Signal" is still indicating that it is safe to buy (see chart 2 below).

Chart 1: 11/04/2011 S&P500 Market Sentiment (Click To Enlarge)
Chart 2: 11/04/2011 S&P 500 "Super Signal" (Click To Enlarge)

Monday, October 31, 2011

Market Exuberance Over Greek Default?

Market exuberance displayed after the Greek default deal was announced may provide for short or intermediate term market gains, but I have one question.  If it is such good news that Europe has negotiated a deal to allow Greece to default on 50% of their debt why not just allow them to default on 100% of their debt?  As we saw over the weekend and today this story is not over yet.  We are now seeing market concern over Italian debt driving Italian bond rate over 6 percent.  This is exactly what should happen when a borrower has overextended themselves, and if allowed to occur this would limit future borrowing and stabilize markets as investors chase the potential for higher returns in the bond market.  However, we will likely witness attempts by the European Union to protect low bond rates.  These attempts to control the natural market response will likely manifest as unintended consequences.

I have updated the sentiment chart below to indicate on the price line buy, tentative buy, sell, and tentative sell periods (see legend).  It is important to note that as long as the green line remains below zero the market remains in a long term buy period, but I suggest that you only make market entries on days when the market closes at least 2% lower.  Always utilize a cost averaging methodology to avoid over commiting to any single entry or exit.  The buy, tentative buy, sell, and tentative sell signals are based on a set of consistent rules applied to the data set.
  1. Buy - a buy signal (green) which indicates a long term signal has confirmed its trend.
  2. Tentative Buy - a buy signal (yellow) that indicates a good opportunity, but the signal has indicated before a long term trend is established.
  3. Sell - a sell signal (red) which indicates a long term signal has confirmed a trend shift.
  4. Tentative Sell - a sell signal (purple) that indicates a good opportunity, but the signal has indicated before a long term trend is established.
Chart 1: 10/31/2011 S&P 500 Market Sentiment
Chart 2: 10/31/2011 S&P 500 Ultimate Sell Signal

Sunday, October 23, 2011

Intermediate Market Resistance Expected

Since the last post, the market has continued an upward trend.  However, the blue line in the chart below is indicating that the market is sensing resistance (not completely unexpected as the price approaches the 200 day SMA).  Although a good sign is that the long term sentiment line (green) has leveled out.  This indicates that there has been an improvement in the long term sentiment.  However, for safest entry point, wait until it crosses the orange signal line for confirmation. Also a good entry point may be soon after the green line seperates from the yellow signal line, but the risk for a reversal is higher especially since the slope of the 200 day SMA is negative .  Remember also try to only make entries on days when the market has taken a significnat drop.  Typically I wait until right before market close to place mutual fund purchase orders.

10/21/2011 S&P 500

10/21/2011 S&P 500

Sunday, October 16, 2011

The Market Established A Floor ... But Be Cautious.

Just a couple weeks ago it appeared that the markets were likely to slip into another recession, the Euro was on a path to collapse.  However, the market has rallied over the last 2 weeks suggesting that the market is betting that we are not headed into another recession, and the Euro is not going to collapse.  However, there are still significant headwinds facing markets around the world:

1. European debt crisis (Portugal, Italy, Ireland, Greece, Spain).
2. US Housing Market
3. Bank Mortgage Fraud
4. US High Unemployment
5. Chinese Banking (click on link to see story)
6. Chinese Real Estate Bubble? (click on to see video report)

The chart below indicates that market sentiment has indeed made a marked shift towards positive gain.  However, the long term trend is just now beginning to level out.  Whatever one does, do not buy the rallies.  Wait for significant down days (at least 2% drops) for entry points, and do not over commit.  I believe the market will tend to trend upward for the time being, but it will continue to be highly volatile as long as interest rates remain near zero.

Chart 1 - S&P 500 Sentiment 10/14/2011 (click on chart to enlarge)

The chart below is also indicating that we have not signaled a market crash yet as it did in 2001 and 2008:
Chart 2 - S&P 500 Market Crash Signal (click on chart to enlarge)


Sunday, October 2, 2011

S&P 500 - Still Tentatively Bullish

The intermediate signal line (blue - graph 1) continues to approach zero, but the slope of the long term signal line (green - graph 1) is still negative and the slope of the 200 days simple moving average has turned negative.  The new signal (graph 2) has not indicated that the market is crashing. This appears to be confirmed by the fact that despite all of the headwinds that the market appears to be facing and the limited upside potential the market has held within the trading range of 1101.54 and 1231.71 suggesting that the market has either found a floor or is waiting on a significant indicator (i.e. news out of Europe, third quarter results, etc.).

09/30/2011 S&P 500 Chart 1 - Click To Enlarge
09/30/2011 S&P 500 Chart 2 - Click To Enlarge

Monday, September 26, 2011

S&P 500 - Tentatively Bullish

Last Sunday I posted that the market had confirmed an intermediate bullish shift in sentiment.  Therefore, the price movement on Wednesday & Thursday last week were exactly what we were looking for as entry points.  However, the price move was so dramatic that it reduced the slope of the intermediate signal line indicating that sentiment is tentatively bullish.  If the intermediate signal line (blue) peaks before crossing zero it will indicate that we will likely see new lows, but for now the slope remains positive.  As described in my August 19, 2011, since the long term sentiment remains negative and the slope of the 200 day simple moving average is not clearly positive it is still risky to make market entries, but the higher risk may lead to higher returns.  Therefore, a cost averaging strategy that accounts for the higher risk should be employed.

Note:  I have added the chart below to its own page (see tab at top) to be updated daily. 

9/26/2011 S&P 500 (click on chart to enlarge).

Sunday, September 18, 2011

S&P 500 - Bullish Shift In Sentiment + New Signal Developed

Last week the intermediate sentiment signal (the blue signal line in Chart 1 below) is close to crossing above a 1/3 rise from its minimum (pink line).  This indicates that we are entering an intermediate buy period which will last until the intermediate signal line climbs to 2/3 above its minimum.  However, the long term sentiment remains bearish and the slope of the 200 day simple moving average (200 SMA) is beginning to turn negative which is another long term bearish signal.  But a new signal that I have developed (see chart 2 below) indicates that it is not likely that we are to experience a 2001 or 2008 market crash scenario.  Therefore, this may be a good time to begin incremental purchases of an S&P 500 Index Fund or similar.

Chart 1

Chart 2: New Signal



Friday, August 19, 2011

S&P 500 Sentiment Indicates - Entry Risk High

The market sentiment signal appears to be a very good indicator so far as to when to avoid entry and reduce exposure to the market.  However, the intermediate signal has still not indicated that we have entered a buy period, although earlier this week it appeared to begin leveling out.  However, the last couple days eliminated this trend change driving the intermediate and long term signal lines even more negative (see the chart below - click on chart to enlarge):



The intermediate signal will likely trigger a buy period in the next several weeks.  Therefore, we need to consider the worst case scenario in our recent history, and keep the following information in mind when developing a purchase strategy.  I recommend developing an incremental purchase plan.  Keep in mind that earlier purchases can result in higher returns, but are the highest risk entry points since a trend is not fully confirmed.  As an example I have included a chart of the 2008 buy period below (click on chart to enlarge):


The chart above shows that buy period was signaled from approximately March 2007 until April 2009.  During this buy period, six (6) intermediate buy signals triggered and four (4) long term buy signals were triggered. It is important to note, that during this period the slope of the 200 day simple moving average was negative.  As of right now the slope of the 200 day simple moving average has plateaued and is threatening to turn negative.  This may indicate that we are in for a similar long term bearish period (or buy period), and one may want to be very conservative about the entry strategy and apply more weight towards the end of the buy period rather than the beginning.
  

Sunday, August 14, 2011

Continue To Hold -

Some relief experienced last week, but I believe the potential for market volatility is still high.  To me this market crash appears to have more to do with a loss in trust.  Overall the market has experienced an earthquake.  The grounds on which it operates have been shifting and it is now nervously waiting for the tremors. This earthquake is a result of simple supply & demand equations being manipulated and altered by some very big players.   The biggest news being that the Fed took unprecedented steps by announcing that Fed rates will be held at near zero until the middle of 2013.  The loose money policy will likely continue to drive bubbles in the market.


Continue to hold until the slope of the intermediate line begins to turn positive.  However, the 200 day simple moving average has begun to turn negative indicating there may be significance to the latest market move and that one should be cautious with any entry.

 

Friday, August 5, 2011

Holding Pattern Extended - As Market Panics

In the last post dated July 11th, 2011, after Alcoa reported a 27% increase in earnings despite a 24% increase in the price of aluminum, I stated, "This should be a good sign since demand has not indicated weakness despite inflationary forces on commodities such as aluminum.  Assuming the doom sayers are wrong (and they usually are) this is a solid indication that the markets will find their footing by the end of July to mid August." This last couple of weeks has given the doom sayers a lot of ammo, and the market is reacting in a panic.  This will create opportunities as the market corrects.  However, the global financial mess will continue as long as countries hold interest rates at artificial record lows.  Historically low interest rates put us in this position, and it doesn't seem logical to me that more of the same will take us out of it.  Until interest rates rise, we will see higher volatility in the market as investors chase higher yields at greater risk while trying to avoid significant losses.  A good sign (or logical) to me is that bond rates have gone up for the PIGS.  For now this has resulted in lower yeilds on US Debt, but I expect this to be temporary.

My strategy so far has been to hold about 50% in equities and 50% in secure assets (bonds, etc.) as I continue to wait for the slope of the intermediate signal line (blue) to turn positive (see chart below).  When this signal is triggered,  I will begin employing a cost averaging strategy of transferring incremental amounts from secure assets to equities on days or weeks when the market has dropped significantly.  It is important to note that there is no fool proof strategy, and there is risk entailed with every investment strategy.

Sentiment Chart Updated 8/5/2011 (explained in previous blogs):

Monday, July 11, 2011

Market Confusion = Volatility = Opportunity

Last week we saw a rally that ranked in the top 1% of all rallies and we begin this week with a 1.8% drop in the S&P 500.  Many headlines claim this is a reaction to concern over US and European debt worries, but I believe the primary drive to this volatility is pre-earnings reports uncertainty.  However, the uncertainty is even greater due to many fundamental economic concerns. 
But today Alcoa reported more than double profits, over 2nd quarter 2010, of 28 cents per a share with a 27% increase in earnings.  To me this indicates that the demand for aluminum has held despite a 24% increase in the price of Aluminum (Bloomberg article - Alcoas Profits Follow Rising Aluminum Prices).  This should be a good sign since demand has not indicated weakness despite inflationary forces on commodities such as aluminum.  Assuming the doom sayers are wrong (and they usually are) this is a solid indication that the markets will find their footing by the end of July to mid August.  Be on hold to take advantage of the opportunities.  It is impossible to time the market perfectly, but I will begin adding to equity positions (as the market drops) when the  slope of the blue (intemediate) signal line turns negative and then begins to indicate that its slope will turn positive (levels out) or when the green (long) signal line indicates that it is going to level out below zero. See the chart below:

Click on images to see larger image.

This chart displays a measure of market sentiment (as measured by the S&P 500) on both an intermediate and long term basis. I have highlighted where historical buy, hold, and sell zones were indicated by the signal lines. One can use the bottoms of the intermediate signal line (blue) as indication for ideal periods of cash infusion in a held position. That being said, the peaks of the blue line can also indicate ideal periods for transfers out of a position.


I have also begun to work on another indicator.  This indicator will try to gauge the overal value of the market relative to a benchmark such as the 10 Year Treasury Bond.  Such an indicator could help indicate periods where probability for potential gain is greater than the probability of potential loss.  The chart below compares the Price/Earnings Ratio of the S&P 500 to the Price/Earnings of the 10 year treasury:















Click on images to see larger image.




Tuesday, July 5, 2011

Market Rally Premature - Entry Risk High

As posted last week on June 27th, I stated that the intermediate signal line was indicating that the market was likely to recieve a short term bounce. The market proceeded to bounce indeed: "It was the 29th best week for the stock market out of 3,207 weeks since 1950. That would put it in the top 1% of all weekly rallies over the past 60 years." (Erik Swartz - July 5th, 2011 - Minyanville).  This rally indicates that the general market believes support has been demonstrated at the March 2011 lows (S&P 500 at 1256).  However, it is my opinion that it is still premature to make a long term entry. I believe entering a position at this time is still too risky.  Any weakness in the market as a result of second quarter earnings, european/US debt crisis, Chinese interest hikes, or any other bad news will likely drive the markets lower.  Therefore, I would recommend waiting until a long term trend has been established, but if you want to take a risk; wait till this rally has receded to add to or enter a position. I still expect the next buy peirod to be triggered later in the third quarter 2011.

S&P 500 P/E Ratio Currently at 23.64 (historical mean P/E is 16.4) http://www.multpl.com/
This chart displays a measure of market sentiment (as measured by the S&P 500) on both an intermediate and long term basis. I have highlighted where historical buy, hold, and sell zones were indicated by the signal lines. One can use the bottoms of the intermediate signal line (blue) as indication for ideal periods of cash infusion in a held position. That being said, the peaks of the blue line can also indicate ideal periods for transfers out of a position.




Monday, June 27, 2011

S&P 500 Sentiment Negative

Based on the chart below, at this time it appears that the S&P 500 may get a short term market bounce (although not clearly indicated yet).  The long term sentiment still appears to be highly bearish.  Expect the next buy peirod to be triggered towards the end of third quarter 2011 or beginning of the 4th quarter.


This chart displays a measure of market sentiment (as measured by the S&P 500) on both an intermediate and long term basis. I have highlighted where historical buy, hold, and sell zones were indicated by the signal lines. One can use the bottoms of the intermediate signal line (blue) as indication for ideal periods of cash infusion in a held position.  That being said, the peaks of the blue line can also indicate ideal periods for transfers out of a position.