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).