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.
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| Chart 1: 01/20/2012 S&P 500 Sentiment Chart (click to enlarge). |
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| Chart 2: 01/20/2012 S&P 500 Super Signal (click to enlarge). |
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| Chart 3: Week of 01/23/2012 S&P 500 Expected Range (click to enlarge). |
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