S&P 1100? Not an outlandish idea. My thoughts on the matter:
· Advance/Decline Oscillator: Issued sell signal 2 months ago (2 month lag typical, conclusion: correction imminent)
· Slow Stochastic Oscillator: At elevated levels, %K line below %D and recent cross under 80 line (technical sell signal)
· RSI: 58, recently topped out near 78 (sell signal)
· Shiller 10 Year PE: > 22, historical average is 16. According to historical data the expected annualized return for the S&P500 now stands at less than 5%
· 20 day average of the CBOE Equity Put/Call ratio: ~.47 (an extreme bearish contrarian statistical outlier)
· Investor’s Intelligence Bull/Bear ratio: 3.0 (high outlier- excessive market optimism)
· VIX: 19.9, rising above short term moving averages, symptomatic of market complacency
· Market Neutral Hedge Fund sentiment at high bullish levels:
It appears that when Market Neutral Strategy hedge funds are net sellers (< -50%) the market usually follows suit with a rally, and conversely when they are net long (> +50%) the market usually corrects. [This statistic may prove to be very helpful when deriving market timing strategies.] According to this chart we are facing the risk of a mild to moderate correction. (See chart below)
· 2010 and 2011 consensus Year over Year EPS earnings estimate growth rates both exceed 20%. This has never occurred in the history of the SP500 index. Therefore, market analysts’ forward valuation metrics are likely overly optimistic and off base. In other words, because earnings expectations are so high, companies will likely meet or disappoint in respect to earnings hurdle rates in future quarters.
Based upon these indicators I issue an imminent SELL rating on the S&P500 with an expected downward price correction of (-7%) from today’s levels. In summary, this conclusion is justified by the convergence of factors related to the over-valued, technically over-bought, and excessively optimistic nature of the current market environment.
