Markets Are Waiting For Good or Bad News

I first want to apologize for not updating this blog since September 17th.  I have been very busy trying to repair one of our rental properties so that we can place it back on the market, and I have also suffered through two medical emergencies since the last post.  Despite FED manipulation the week prior to September 17th the markets finally signaled a close to the sell period at the beginning of October (Chart 1 below). Right now the market remains in a holding pattern waiting for a sign (good or bad). Lately we have seen some very low volume market swings over the last two weeks, but participation seems limited and the general consensus appears to be caution.  A movement of the intermediate sentiment signal (blue signal line in Chart 1) above the pink line will indicate a tentative buy signal, but for now the best thing to do is wait on the side lines for an opportunity. 

For now the "Super Signal" (Chart 2 below) is indicating that there is no immediate risk of market collapse.  Although it is currently trending lower and approaching the same level indicated as the 2008 signal formation as indicated by the pink dashed line.  For more information on the "Super Signal" visit my Super Signal Charts page.

The expected trading range for the week of November 26th, 2012 is +/- 2.04% or a low of 1,380 and a high of 1,438 for the S&P 500.  Also based on recent historical performance the expected trading range chart is indicating that we may be approaching a good buying opportunity as the weekly expected volatility increases and moves back above the average trading range (see Chart 3 below). 

Chart 1: 11/27/2012 S&P 500 Sentiment Signals

Chart 2: 11/27/2012 S&P 500 Super Signal

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Two Words: FED Manipulation

Last week we saw the FED promise to continue to manipulate the market until 2015.  $40 billion dollars per month.  History has proven that market manipulation has only ended in disaster.  I don't think disaster is around the corner for now, but I do think a market correction is long overdue.  Both charts below are indicating that correction is likely to come soon.  It would have come sooner without FED manipulation.  The long term sentiment, indicated by the green signal line in Chart 1 below, is about to cross below zero usually indicating the end of the sell period.  However, the slope of the intermediate signal line (blue) has turned positive.  This could extend the selling period beyond the long term sentiment going below zero (as it did in June 2011).  It all depends on how safe you want to be.

Chart 1: 09/17/2012 S&P 500 Sentiment Signal

The weekly S&P 500 expected trading range for the week of 9/17/2012 is +/- 1.95% or between 1437 and 1494. Futhermore, the expected trading range has dropped below the average trading range.  A move below the average (since 1952) has, in recent history, indicated a good period to sell (see Chart 2 below).  Could be indicating reduced volatility due to upper resistance.

Chart 2: S&P 500 Weekly Expected Trading Range 9/17/2012.

Selling Period Extended, but Near End

The market signaled entry into a "Tentative Sell" period, according to the S&P 500 Sentiment chart below, on June 13, 2012 and entered the confirmed "Sell Period" on July 18th.  In my last post on July 15th, I stated based on the trend of the long term signal that the "Sell Period" should end around August 15, 2012.  The signal stayed on track until just prior to August 15th when the long term signal leveled out and has remained on that trajectory for some time.  I have been too busy to post since July 15th, completing rental property repairs,  and I apologize for not posting sooner if anyone was interested in this information.  However, it appears clear to me that the trend of the long-term signal is likely to continue to go lower and follow the intermediate signal trend.  I believe we will see a retracement to around the 200 day simple moving average or 1356 as fears settle in that there is little gain left in the market for the rest of the year and that  promises of near future stimulus are empty.

Image 1: 08/27/2012 S&P 500 Market Sentiment Chart

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Significant Drop In Weekly S&P500 Trading Volume

The S&P 500 sentiment signal is still indicating "Tentative Sell" although very close to indicating "Sell" (green line Chart 1).  This is not the only signal that is indicating sell.  Weekly average volume has also suddenly dropped for the past two weeks despite market improvements.  The weekly average volume was 2.85 x 10^9  last week and 2.80 x 10^9 the week before.  These are both outside of two standard deviations of a 40 week average of 3.88 x 10^9.  This is a significant reduction in trading volume.  Low trading volume as the market trend is improving is generally not a good signal.  This is just one more technical signal indicating that it may be a good time to re-balance some assets away from stocks or stock mutual funds.  Based on the trend of the long term sentiment signal the "Sell" period will last until around 8/15/2012.

This weeks expected S&P 500 trading range is between 1,316 and 1,397 (Chart 2 below).

Chart 1: 07/13/2012 S&P500 Sentiment Signal

Chart 2: 7/16/2012 Weekly Expected Trading Range

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S&P 500 Tentative Sell Signal Formed

Last week the S&P 500 triggered a tentative sell signal (see Chart 1 below).  This indicates that it is now time to begin looking for opportunity to reduce long positions in equity markets (always incrementally).  I break down sell periods into two phases a "Tentative Sell" and "Sell" period.  Historically there have been some reversals of a Tentative Sell signal, but sometimes the Tentative Sell period could be the best time for gains.  Based on the current slope of the long term signal it appears that both phases of the sell period will last about 2 months.   What I find interesting though, is that we are beginning to see the slope of the 200 Day SMA turn positive.  This is usually a signal that we are at the beginning of long term market gains (look back at July 2010 as reference).   Therefore, I will begin to re-balance my portfolio to be about 50/50 by mid August (50% equities, 50% bonds, secure assets, and cash).

Important Note: If invested in mutual funds make sure to not violate the funds rules when selling.

This weeks expected trading range is +/- 3.30% of between 1,299 and 1,387 as shown in Chart 2 below.

Chart 1: 06/15/2012 S&P 500 Sentiment Signals

Chart 2: Week Of 6/18/2012 S&P500 Expected Trading Range

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Up, Down, Up ....

For the last 5 weeks the S&P 500 has sea-sawed up and down, and after last weeks performance of 3.73% I wouldn't expect a repeat, but the intermediate signal in Chart 1 is indicating that the market is improving.

The close last week fell outside of the expected trading range (above 1,322).  However, the long term sentiment signal is likely to indicate the first tentative signal to sell within the next 2 weeks.  With the intermediate signal improving it may be the perfect time to begin incrementally transferring out of equities into bonds or secure assets.  If the intermediate signal maintains its trajectory.  I would time my transfers to begin after the intermediate signal crosses zero.

Chart 1: 06/10/2012 S&P 500 Sentiment

Lions, Tigers, & Bears Oh My! What To Do?

Last week the S&P 500 declined 3.1%.  This decline also resulted in a close below the 200 SMA, but the S&P 500 also just barely closed within its expected trading range of 1273 and 1,363 (still statistically normal).  The constant negative economic news out of Europe and a poor jobs report seems to have pushed many investors to sell (in my opinion - early).   Although it doesn't appear probable, signals are indicating that we are likely to see a short term rebound by the market.  I am convinced that Europe is going to do everything it can to try and assure everyone that the system is not going to collapse.  I don't know what rabbit they are going to pull out of the hat next; but I am convinced that they will, and it will initially be successful at kicking the can along a little more.  I expect that eventually there will also be somethings offered along the lines of cross border deposit guarantees that will bolster those beliefs.  =

Based on the "Sentiment" signal in Chart 1 below, it suggests that it is still too early to sell, and one should wait until the first "Tentative Sell" signal indicates.  As displayed in Chart 1 below, the slope of the long term signal appears to suggest that we could see the first "Tentative Sell" signals as early as mid June.  However, the intermediate signal appears to be at a possible inflection point indicating that the probability of a short term market rebound is likely.

The expected weekly trading range, for the week of June 4th, 2012, as shown in Chart 2 below, is between 1,234 and 1,322 (or +/- 3.47%).

Chart 1: 06/01/2012 S&P 500 Sentiment

Fed Twist To End June

Operation Twist began September 21,2011 and is expected to end in June.  The S&P 500 climbed from 1,166.76 on September 21, 2011 to 1,419.04 on April 2,2012 or a 21.6% gain at the peak.  The S&P 500 has recently dropped to 1,317.82, but still has presented a12.9% gain; not too bad.  I am not sure what impact Operation Twist had on the market, but it seems clear to me that it helped play a role in the markets improvement.  As the market closed on Friday 5/18/2012 at 1,295 the ten year treasury notes were near their lowest level and the spread between the 2 year and 30 year bond rates were at a record high.  This tells me that the Fed was successful in achieving their desired results, but the troubles in Europe did not hurt their cause as well.

As the Twist comes to an end, it is likely that there will not be an immediate response from the market or the Fed, for that matter; as I expect that long term bond rates will remain low as long as the risks from Europe persist. We begin to hold for the tentative sell signal as the long term sentiment signal (Chart 1) has just peaked last week and continued its decline this week.  I expect that the tentative sell signal will present by the end of July based on the slope of the long term signal.  The expected trading range this week (Chart 2) is between 1,273 and 1,363 (or +/- 3.41%).

Chart 1: 05/25/2012 S&P 500 Sentiment Signal

S&P 500 Drops 4.2%

Last week the S&P 500 dropped 4.2%.  This result was well below the lower range of a 40 week expected trading range, or what I would classify as significant.  This has caused the long term sentiment signal to peak (green line in Chart 1 below).  This does not indicate a signal to sell.  The market has dropped 7.7% over the last 3 weeks.  Since 1950, the market has only had 261 periods where the market declined 3 weeks in a row (or 8% of the time).  This means that there is about a 95% chance that the market will end in positive territory this week.  Furthermore, valuations look great for many well positioned companies, and I believe there are many bargain hunters who have been just waiting for a move like the one last week.  There may be some hesitation due to news out of Europe, but this will likely be short lived.  My advice would be to maybe buy this correction, but definitely hold.  The expected weekly trading range, as indicated in Chart 2 below, is +/-3.54% (or 1,249 to 1,309).

Chart 1: 05/18/2012 S&P 500 Sentiment Chart

S&P 500 1,340 Tested

According to CNBC's Fast Money article, "Technical Trouble: S&P Breached 1340", written by Lee Brodie on 3/14/2012, an important technical level was breached today at 1,340 and the next technical level to look for is 1,305.  The article states that if the S&P 500 goes to  1,257 it will be flat for the year, and it is expected to test this level sometime in the year (historically common).  Based on the intermediate signal in the "Sentiment Chart", displayed as a blue line in Chart 1 below, the market is likely to test the 1,305 support level short term (some time in the 2nd quarter).  However, where my analysis differs from the experts at Fast Money, for mutual fund investors the long term signal (green line Chart 1 below) indicates that it is not time to sell yet, and a break below 1,309 this week could be a significant buy opportunity (outside of 2 standard deviations of a 40 week average).  According to this weeks expected trading range, displayed in chart 2 below, it is expected that trading will be between 1,309 and 1,398 (+/- 3.32 %).  

Chart 1: 05/14/2012 S&P 500 Sentiment Chart 

2nd Quarter Corrections Continue

One week we are up the next week we are down.   As I stated previously, I expect this quarter to remain in a corrective mode.  Last week the market closed down 2.4%, but still within the expected trading range.  The long term sentiment (Chart 1 - green line) has still not peaked indicating that the market is likely to move higher.  Furthermore, the slope of the 200 day simple moving average has turned positive another long term bullish indicator.  I believe that long term sell signals will not form until the 4th quarter of 2012.  The expected trading range this week is +/- 3.61% or between 1,319 and 1,418 as shown in Chart 2.

An article written by Michael Baron of The Street titled, "Market Preview: A Welcome Correction?", does a good job of spelling out my expectations.

Chart 1: S&P500 Sentiment Signal 5/7/12

Vindication For Those Who Held

Those who have held, over the last few weeks, were vindicated with a 1.8% market gain last week.  However, I expect that as long as the intermediate sentiment signal line (blue line in Chart 1) remains below zero, market corrections will be likely.  On the other hand, the long term sentiment signal (green line Chart 1) is indicating that market bulls will continue to reign.  This indication is bolstered by the fact that US bond rates remain at record lows.  Until there is a flight from US bonds (gradual or sudden)  US equities should continue to benefit from low interest rates and a lack of other investments that can provide liquidity, diversification, and returns like stocks.  The expected trading range this week is +/- 3.56 % or 1,353 to 1,453 as shown in Chart 2.

Chart 1: S&P 500 4/27/2012 Sentiment

Chart 2: S&P 500 4/30/2012 Weekly Expected Trading Range

Additional 2nd Quarter Corrections Likely, but Hold Steady

In the last two weeks the market has declined.  The week of April 2nd saw a drop of 0.74% and the week of April 9th saw a drop of 1.95%.  These declines were within the expected weekly trading range.  I expect that the 2nd quarter of 2012 will not be quite as frothy as the first quarter and expect additional corrections based on the fact that the intermediate signal (blue line Chart 1 below) crossed zero last week.  The long term signal (green line Chart 1) has not indicated that it is time to sell so one should continue to hold and seek opportunity when there is a significant decline. This week the expected S&P 500 range, as shown in Chart 2 below, is between 1,321 and 1,420.

Chart 1: 4/13/2012 S&P 500 Market Sentiment

Chart 2: 4/16/2012 Weekly Expected Trading Range

 The "Super Signal" was indicating in December last year that the market could be heading for a crash in 2012.  However, the first quarter rally has caused the "Super Signal" to fully reverse course.  The "Super  Signal" is very unlikely to form in 2012 and lends some support to the long term Sentiment signals indications in Chart 1. Based on these signals I expect that it is safe to stay invested in equities at least through the end of 3rd Quarter 2012.

Chart 3: Super Signal

S&P 500 Intermediate Sentiment Continues Decline

Not much has changed in the past two weeks since my last post.  The market has continued to seem to defy gravity.  For more than a month now, I have expected the market to decline on an intermediate basis.  I want to point out though that there has been no change in the overall strategy to remain in a holding pattern on already held positions since 2/13/2012.  I have simply been looking for a significant drop in the market to indicate a possible good opportunity to add to held positions.  Previous analysis of the likely short term market decline is based on the trend of the intermediate sentiment (blue line chart 1 below).  However, as one can see, the slope of the intermediate sentiment line decreased and has taken much longer to cross zero than previously expected.  The slope of the intermediate sentiment line remains negative and is very likely to cross zero very soon.  This may result in a short term drop in the market.  The slope of the long term sentiment signal (green line chart 1 below) remains positive and indicates that the market prices shall continue to remain buoyant on a long term basis.  The expected trading range next week (Chart 2 below) is between 1357 and 1460.  A drop below 1357 would indicate a significant decline and could be a good buy opportunity.

Chart 1: S&P 500 03/30/2012 Sentiment Signal (click to expand).

Chart 2: S&P 500 Weekly Expected Trading Range (click to expand).

S&P 500 Continues Intermediate Sentiment Decline

According to the charts below not a whole lot has changes since the March 4th post.  The long term sentiment (green signal line Chart 1 below) is still very positively sloped towards continued positive growth.  However, the intermediate line (blue signal line Chart 1) is still negatively sloped.  This indicates that we will likely see an intermediate pull back in the market.  If the drop begins this week a drop below 1352 would indicate a statistically significant move, and a potential buy opportunity (see Chart 2 below).

3/16/2012 S&P 500 Sentiment Signal (click to enlarge).

S&P 500 Intermediate Sentiment Decline

The S&P 500 Sentiment Chart (chart 1 below) is indicating that intermediate sentiment (blue signal line) is trending lower.  This suggests that the market will lose some of its momentum and may turn lower.  During this period, long term sentiment is indicating that one should hold.  If the market drops below the expected trading range of 1,318 it could be an opportune time to increase ones market position.  If the market moves above 1,420 it could be an opportune time to take some profit off the table (chart 2 below).  The slope of the intermediate line is currently indicating a market decline between now and mid March.

S&P 500 Confirms Bullish Sentiment

Last week I posted that the S&P 500 was indicating that it was set to decline.  All signals seemed to be pointing in that direction, but instead it posted a 1.35% gain for the week.  Technical signals are not always right.  They only improve your odds of being right.

Last week the strength of this market has pushed the long term sentiment signal (green line Chart 1) to close above the zero signal line (a close above zero indicates that the bullish sentiment has fully confirmed).  Last weeks price movement has also shifted the intermediate sentiment signal (blue line Chart 1), to change direction so that it no longer has a negative slope and not clearly indicating decline. Since the long term sentiment signal line has crossed zero we are no longer in what I can call a "buy" period.  Instead we are moving into a hold period.  However, it could be prudent to take additional equity positions during this period if the market experiences a "significant decline" while the long term sentiment signal maintains a positive slope (strategy-principle 2).  A significant decline is any move below the expected weekly trading low  as shown in Chart 2 below.

Chart 1: 02/19/2012 S&P 500 Sentiment Chart (click to enlarge)

Near Term S&P 500 Decline Likely - Creates A Buy Opportunity

Well, the S&P 500 finally could not maintain the rip roaring run and closed lower than it opened last week, although just barely below by -0.125%.  However, the slope of the intermediate sentiment signal (blue line in Chart 1 below) has turned negative and is indicating that we are likely to see a continuation of a market decline this week.  A pull back in the market is expected and should be bought.  The long term sentiment signal line (green) is still trending positive, but has not crossed zero yet and so we remain in a "Buy" period.  The expected trading range this week, as indicated in Chart 2, is 1,290 to 1,395 or +/-3.89%.  A drop below 1,290 will indicate a significant buy opportunity.

Chart 1: 02/12/2012 S&P 500 Sentiment Chart (click to enlarge)

Chart 2: 02/12/2012 S&P 500 Expected Weekly Range (click to enlarge)

S&P 500 - 97% Probability Close Lower This Week

The S&P 500 has now posted 5 positive weeks in a row; and what a week it has been, with a 2.18% gain this week alone.  Based on historical data there is approximately a 97% probability that the S&P 500 will close lower this week.  The expected pull back in the market could be healthy for the market, and good for longer term growth.

The S&P 500 has continued to buck many analysts expectations. However, if you recall the "Sentiment Signal" has been indicating a "Tentative Buy" period from September 19, 2011 and a stronger "Buy Period" from December 19, 2011.  The signal has not wavered since November 23, 2011 and has continued to show strength.  As the "Sentiment Signal" (Chart 1 below) indicates we continue to remain in a buy period.  Therefore, despite what the market does it is my recommendation to keep re-balancing from short cash and bond positions into long equity positions.  Based on the green dashed line below, representing the expected trend, the buy period will end about mid March (or 29 trading days).  The "Super Signal" (Chart 2 below) also is confirming the market sentiment trend and has shifted direction away from formation indicating that the market is not likely to collapse in 2012.  The expected trading range has narrowed to +/- 3.81% or a low of 1,293 and high of 1,396 (Chart 3 below).  A move below 1,293 will indicate a significant buy opportunity.

Chart 1: 02/03/2012 S&P 500 Sentiment Signal (click to enlarge)

S&P 500 - 89% Probability Weekly Close Down

There is not much to say about this past week.  The S&P 500 was up only 0.08% for the week, but it was up.  This marks the 4th consecutive week in positive territory.  Therefore, there is approximately an 88% probability that this week will close lower than it opens (or a 12% probability to close up).  However, the "Sentiment Signal" (Chart 1) continues to indicate that one should be buying incrementally during this period.  The expected end of the buying period is indicated by the green dashed line which represents the prevailing trend (expect buying period to end around March 15th).

The "Super Signal" trend (Chart 2) has also shifted towards improvement and is no longer trending towards formation. Currently the signal is at  4.12 an improvement over last week from 3.95 (the 2nd week of improvement); formation in 2008 occured at 3.05. If this trend shift continues it will indicate that it should be relatively safe to remain invested in equity markets through 2012.

Chart 3 below displays the expected weekly trading range for this week between 1,265 and 1,368 (or +/- 3.91%).  A drop below 1,265 would be considered a significant move and a good buy opportunity.

Chart 1: 01/27/2012 S&P 500 Sentiment Signal (click to enlarge)

S&P 500 Gains Steadily - Is It Time To Buy?

Last week the S&P 500 gained 1.95% and has posted 4.40% gains since January 1st.  It is not likely that the rate of gains is sustainable and so it is likely that we'll see a short term pull back in the market.   However, the "Sentiment Signal" (Chart 1) is indicating that it is time to re-balance ones portfolio to be more heavily weighted in equities (equities that tend to track the S&P 500).  Therefore, any short term decline in the market should be bought incrementally.  The trend of the "Sentiment Signal" is suggesting that ideally one should be re-balanced by mid March; or an incremental investment over about the next 60 days.

The trend of the "Super Signal" (Chart 2) is also confirming the "Sentiment Signal" and has actually shifted so that it is no longer clearly trending towards formation.  We'll watch this signal closely and if it continues to improve we may be heading into a very long term period (at least 1 to 2 years) of general growth in the S&P 500.   This is counter to the belief that Europe is  going to collapse any other day.  Although I keep one eye on the news, I follow the charts rather than the news because the news is often late to a story or trend change.

Some stability has returned to the market and we have seen reduced volatility.  This also supports the "Sentiment Signal".  The weekly expected volatility is now reduced to +/- 3.85% (nominal is +/- 2.24%) or an expected low of 1,265 and a high of 1,366 as indicated in Chart 3 below.  A drop below 1,265 would indicate a significant purchase opportunity or any drop of 3.85% on any one day.

Chart 1: 01/20/2012 S&P 500 Sentiment Chart (click to enlarge).

S&P 500 Signals Indicate Buy Despite Europe

Despite the downgrade of European Bonds last week, the long term market and intermediate "Sentiment" signals are indicating that it is time to reallocate ones 401K towards stock or equity investments.  Based on the existing trend, the long term sentiment signal will cross zero in early March of 2012.  This indicates that there is approximately 10 weeks before signals will indicate a hold period. The hold period should last at least one quarter and is important for those investing in mutual funds, because it then offers the opportunity to transfer out of positions without penalty when sell signals display.  The expected trading range, as indicated in Chart 2 below, is +/- 3.96% or between 1,238 and 1,340 this week.  Any dip below 1238 or a -3.96% drop will indicate a significant buy opportunity; and during the buy period one should not only look for these opportunities, but should also set an incremental purchase/transfer schedule towards ones desired allocation (see investment strategy page).

Chart 1: 01/13/2012 S&P 500 Sentiment Signal (click to enlarge)

S&P 500 Signals Buy Period

The S&P 500 long term "Sentiment" signal has confirmed and is signaling a "buy period" (see Investment Strategy page).  I will continue to buy on days when the market has dropped.  However, I will not just wait for days when the market has dropped below the expected low range.  I intend to rebalance my portfolio to be more heavily weighted in equities between now and the time that long term "Sentiment Chart" signal has crossed zero or until there is formation of the "Super Signal" (whichever comes first).  I believe it will take approximately  10 to 12 weeks for the long term "Sentiment Signal" to cross zero based on the current trend.  The expected trading range for the S&P 500 this week is 1,226 to 1,329 (or +/- 4.02%).

01/06/2012 S&P 500 Sentiment Chart (click on chart to enlarge)

First Half 2012 Expectations Good For S&P 500

Expectations are that 2012 will be a defining year for the US economy and markets around the world.  It appears clear that we will continue to see high volatility in the market as investors try to gauge the best place to put their money for growth and safe keeping.  As long as interest rates remain at historic lows; we will continue to see highly volatile markets.  However, based on current signals it appears that equity markets (as a whole) will continue to improve up until the third quarter of 2012, and then all will be dependent upon perceived market improvement.    The "S&P 500 Sentiment" Chart 1 below indicates that sentiment has confirmed a positive trend and that we have entered a "Buy Period".  This means that a trend has been confirmed and that it is  potentially a good time to begin incrementally re-balancing ones portfolio to be more heavily weighted towards equities.  However, the increased volatility is making it increasingly likely for another market collapse.  This is represented by the "Super Signal" Chart 2 below.  The slope of the "Super Signal" remains negative and is trending towards formation.  Although the trend has improved slightly in the past two weeks.  If the Super Signal Forms, and it appears that it is trending towards formation in next 2 to 3 months, typically there is a peak in the market after formation (on average, about 60 days after).  I'll post more data on historical Super Signal formation later.

This week, as indicated in Chart 3 below, the expected S&P 500 range falls between 1,206 and 1,309 (+/- 4.04%).