2011 was not a walk-in-the-park (an understatement) for most professional and non-professional traders/investors. Never in my lifetime have I seen so much of the market driven by politics and geo-political (Europe) events. 2011 could go down in history as the 'Year-of-Exogenous-Events'. Massive swings in the market have almost become commonplace. Historical 'norms' were thrown out the window.
It is not that the market was terribly bearish or terribly bullish... The problem was the market was both; almost simultaneously.
My hope is 2012 will be better, but it could be more of the same. Take a look at the 12-month time-cycle forecast for the S&P 500, below:
Starting in January, a Bull-market looks to be in charge, with a dramatic run higher to the 1380 level. That's nearly a 9% gain.
Then, the market plummets back down to the 1210 level. If that happens, we would be looking at more than a 12% Bear-market that only took a little over two months before reaching the bottom.
The market looks to flounder around between May and October, the 'sell-in-May-and-go-away timeframe, followed by a meteoric rise in November as everyone celebrates the likely outcome of the 2012 Presidential election (you can pick which party would provide the impetus for such a run-up in the market just before the election...).
For now, though, this forecast is mostly conjecture. But, it is an interesting forecast and one that you should watch to see if it unfolds exactly as the time-cycle model suggests. I will come back to this in my "Trade Strategy" Section, below...
The Bull/Bear Analysis...
Each week, our computer programs compile the total number of equities in our database (over 6,000) that are issuing new "Alerts" for this coming week. The Alerts can be any one of the following:
- BUY - This means the status of the equity last week was "OUT" and this week, the weekending closing price moved high enough above my 10-week, time-shifted, moving average to trigger a "BUY".
- OUT - This means the equity stopped out by triggering a long-position stop-loss where the equity was sold, or it triggered a short-position stop-loss where the short position was covered.
- SHORT - This means the status of the equity last week was "OUT" and this week, the weekending closing price moved low enough below my 10-week, time-shifted, moving average to trigger a "SELL SHORT".
A running total of these new conditions (BUY, OUT, SHORT) is kept on a weekly and monthly basis. We have found that an analysis of these data provide a reasonably consistent view of short term (upcoming week) and longer-term (next few weeks) of the market, as follows:
- First of all, the ratio of new Short Sell Signals (red line in the Turner CrossOver Oscillator, below) is an excellent indicator of overbought or oversold conditions. Oversold means the market will have a tendency to move from a downward trend to an upward trend.
- We have also found that the total number of Short Sell Signals compared to the total number of Buy Signals is a reasonably good indicator of investor sentiment. The more Short Sell Signals, the more bearish the sentiment. The more Buy Signals, the more bullish the sentiment. This investor sentiment analysis is generally more valid for the upcoming week.
- The Composite (black) line is produced by subtracting the total number of Buy Signals from the total number of Short Sell Signals. Charting this total over time and observing how the red line crosses the black line, often provides an excellent early warning of a market correction.
These data elements, along with charting the trend of the S&P 500 provide the basis for the brief forecast provided in these weekly Reports. It is important to understand that this analysis is based solely on a technical analysis and anecdotally-derived historical observations of these data. I write the weekly forecast based on my observation of the data and the Oscillator chart. Time-cycle data are NOT explicitly included in this analysis.
Investor Sentiment Forecast
For this coming week: "The Bull-to-Bear ratio for this week is 4-to-1 in favor of the Bulls. The red line (Short Sell) continues to moderate its downward trend, which is mildly trending away from an oversold condition. The black line (Composite of Short Sell and Long Buy indicators) is now showing a rather strong bottom has been established, which is a very Bullish formation. The S&P 500 (green shaded area) is trending slightly higher, supporting a Bullish trend. This could be a good week for building long positions."
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer