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).
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| Chart 1: 05/18/2012 S&P 500 Sentiment Chart |
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| Chart 2: 05/21/2012 S&P 500 Weekly Expected Trading Range |
For those who have followed this blog in the past you may recall the "Super Signal" chart below. This signal has only indicated 8 times since 1950 (see
Super Signal Historic Charts) and has proven fairly reliable at predicting when to get out of the market before a crash. At this time it is not indicating that we are immediately near such a period.
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| Chart 3: 05/18/2012 S&P 500 Super Signal |
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