The End of 2011 and the Beginning of 2012…

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:

Keep in mind that a 12-month forecast is more likely than not to change and change significantly. But, just for sake of argument, let’s assume the chart above is actually how the year evolves…

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:

1. 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.
2. 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.
3. 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 the Upcoming Week The Turner Investor Sentiment Forecast provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.

 

The Turner CrossOver Oscillator provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Index) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite Index) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite Index is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite Index from moving lower to moving higher. Market corrections become much more likely the Composite Index crosses the Short Sell Index from above the Short Sell Index to below the Short Sell Index. The market is represented by the green shaded area.

 

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.”