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)

Chart 2: Week of 01/16/2012 S&P 500 Expected Trading Range (click to enlarge)

The "Super Signal", Chart 3 below, is indicating that there has been improvement in the trend and the trend towards formation has slowed.  The solid pink line is indicating the current trend and it appears that the signal line is approaching the 2008 formation level towards the end of the 1st quarter.  If signal formation occurs it will indicate that one should begin moving away from equities in the second quarter since the market typically experiences a slight peak in the market after formation.  Furthermore, the largest declines typically present themselves after the "Super Signal" crosses zero on the signal line (see the Historic Super Signal Charts page on this blog).  Based on the existing trend, the signal line will not cross zero until third quarter 2012.  This trend can change and will be closely monitored.

Chart 3: 01/13/2012 S&P 500 Super Signal (click on chart to enlarge)