S&P 500 Confirms Bullish Sentiment

Last week I posted that the S&P 500 was indicating that it was set to decline.  All signals seemed to be pointing in that direction, but instead it posted a 1.35% gain for the week.  Technical signals are not always right.  They only improve your odds of being right.

Last week the strength of this market has pushed the long term sentiment signal (green line Chart 1) to close above the zero signal line (a close above zero indicates that the bullish sentiment has fully confirmed).  Last weeks price movement has also shifted the intermediate sentiment signal (blue line Chart 1), to change direction so that it no longer has a negative slope and not clearly indicating decline. Since the long term sentiment signal line has crossed zero we are no longer in what I can call a "buy" period.  Instead we are moving into a hold period.  However, it could be prudent to take additional equity positions during this period if the market experiences a "significant decline" while the long term sentiment signal maintains a positive slope (strategy-principle 2).  A significant decline is any move below the expected weekly trading low  as shown in Chart 2 below.

Chart 1: 02/19/2012 S&P 500 Sentiment Chart (click to enlarge)

Near Term S&P 500 Decline Likely - Creates A Buy Opportunity

Well, the S&P 500 finally could not maintain the rip roaring run and closed lower than it opened last week, although just barely below by -0.125%.  However, the slope of the intermediate sentiment signal (blue line in Chart 1 below) has turned negative and is indicating that we are likely to see a continuation of a market decline this week.  A pull back in the market is expected and should be bought.  The long term sentiment signal line (green) is still trending positive, but has not crossed zero yet and so we remain in a "Buy" period.  The expected trading range this week, as indicated in Chart 2, is 1,290 to 1,395 or +/-3.89%.  A drop below 1,290 will indicate a significant buy opportunity.

Chart 1: 02/12/2012 S&P 500 Sentiment Chart (click to enlarge)

Chart 2: 02/12/2012 S&P 500 Expected Weekly Range (click to enlarge)

S&P 500 - 97% Probability Close Lower This Week

The S&P 500 has now posted 5 positive weeks in a row; and what a week it has been, with a 2.18% gain this week alone.  Based on historical data there is approximately a 97% probability that the S&P 500 will close lower this week.  The expected pull back in the market could be healthy for the market, and good for longer term growth.

The S&P 500 has continued to buck many analysts expectations. However, if you recall the "Sentiment Signal" has been indicating a "Tentative Buy" period from September 19, 2011 and a stronger "Buy Period" from December 19, 2011.  The signal has not wavered since November 23, 2011 and has continued to show strength.  As the "Sentiment Signal" (Chart 1 below) indicates we continue to remain in a buy period.  Therefore, despite what the market does it is my recommendation to keep re-balancing from short cash and bond positions into long equity positions.  Based on the green dashed line below, representing the expected trend, the buy period will end about mid March (or 29 trading days).  The "Super Signal" (Chart 2 below) also is confirming the market sentiment trend and has shifted direction away from formation indicating that the market is not likely to collapse in 2012.  The expected trading range has narrowed to +/- 3.81% or a low of 1,293 and high of 1,396 (Chart 3 below).  A move below 1,293 will indicate a significant buy opportunity.

Chart 1: 02/03/2012 S&P 500 Sentiment Signal (click to enlarge)

S&P 500 - 89% Probability Weekly Close Down

There is not much to say about this past week.  The S&P 500 was up only 0.08% for the week, but it was up.  This marks the 4th consecutive week in positive territory.  Therefore, there is approximately an 88% probability that this week will close lower than it opens (or a 12% probability to close up).  However, the "Sentiment Signal" (Chart 1) continues to indicate that one should be buying incrementally during this period.  The expected end of the buying period is indicated by the green dashed line which represents the prevailing trend (expect buying period to end around March 15th).

The "Super Signal" trend (Chart 2) has also shifted towards improvement and is no longer trending towards formation. Currently the signal is at  4.12 an improvement over last week from 3.95 (the 2nd week of improvement); formation in 2008 occured at 3.05. If this trend shift continues it will indicate that it should be relatively safe to remain invested in equity markets through 2012.

Chart 3 below displays the expected weekly trading range for this week between 1,265 and 1,368 (or +/- 3.91%).  A drop below 1,265 would be considered a significant move and a good buy opportunity.

Chart 1: 01/27/2012 S&P 500 Sentiment Signal (click to enlarge)