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.

  

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.



 

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):