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