S&P 500 Signals Buy Period

The S&P 500 long term "Sentiment" signal has confirmed and is signaling a "buy period" (see Investment Strategy page).  I will continue to buy on days when the market has dropped.  However, I will not just wait for days when the market has dropped below the expected low range.  I intend to rebalance my portfolio to be more heavily weighted in equities between now and the time that long term "Sentiment Chart" signal has crossed zero or until there is formation of the "Super Signal" (whichever comes first).  I believe it will take approximately  10 to 12 weeks for the long term "Sentiment Signal" to cross zero based on the current trend.  The expected trading range for the S&P 500 this week is 1,226 to 1,329 (or +/- 4.02%).

01/06/2012 S&P 500 Sentiment Chart (click on chart to enlarge)

First Half 2012 Expectations Good For S&P 500

Expectations are that 2012 will be a defining year for the US economy and markets around the world.  It appears clear that we will continue to see high volatility in the market as investors try to gauge the best place to put their money for growth and safe keeping.  As long as interest rates remain at historic lows; we will continue to see highly volatile markets.  However, based on current signals it appears that equity markets (as a whole) will continue to improve up until the third quarter of 2012, and then all will be dependent upon perceived market improvement.    The "S&P 500 Sentiment" Chart 1 below indicates that sentiment has confirmed a positive trend and that we have entered a "Buy Period".  This means that a trend has been confirmed and that it is  potentially a good time to begin incrementally re-balancing ones portfolio to be more heavily weighted towards equities.  However, the increased volatility is making it increasingly likely for another market collapse.  This is represented by the "Super Signal" Chart 2 below.  The slope of the "Super Signal" remains negative and is trending towards formation.  Although the trend has improved slightly in the past two weeks.  If the Super Signal Forms, and it appears that it is trending towards formation in next 2 to 3 months, typically there is a peak in the market after formation (on average, about 60 days after).  I'll post more data on historical Super Signal formation later.

This week, as indicated in Chart 3 below, the expected S&P 500 range falls between 1,206 and 1,309 (+/- 4.04%).

S&P 500 Expected Weekly Range 1,204 to 1,306

The S&P 500 expected volatility has decreased slightly to +/- 4.05% from 4.13% for the week or an expected trading range of 1,204 to 1,306 as indicated in Chart 2 below.  The long term sentiment signal (Chart 1 below) still indicates that we remain in a "Tentative Buy" period.  Therefore, a price drop below 1204 (or -4.05%) indicates a buy opportunity. The long term sentiment signal (green line) has steadily improved and it is about to cross the first confirmation signal line indicating that we move from a "Tentative Buy" period to a "Buy" period.   However, the "Super Signal" is steadily approaching zero (although showing slight improvement this week) and will likely form around the same level as 2008 if the trend continues.  For now though, the "Sentiment Signal" supersedes the "Super Signal".  If the "Super Signal" forms it does not indicate a time to panic.  It just indicates that it will be time to start making incremental adjustments away from equity positions into shorter term investments.  As you can see in chart 3 below, in 2008 the market rose for a period of one to two months after the Super Signal formed providing opportunity to exit before the crash.

S&P 500 "Super Signal" Formation Jan-2012

Last week the S&P 500 surprised many by posting a 7.39% gain closing at 1,244.28.  It closed above the expected trading range of 1,110.49 to 1,206.85 (as indicated in Chart 2 below).  Although we remain in a "Tentative Buy Period", as indicated by the "Sentiment Chart" (Chart 1 below) there were no buy opportunities  last week since the markets closed up or above the expected trading range every single day (for further explanation see Investment Strategy Page).  However, I am growing concerned by the trend towards the formation of a "Super Signal" (see chart 3 below).  The increased volatility of the market, with the expected weekly range now above +/-4%, adds further credence to these concerns.