Same Kind of Different as S&P

Counter-argument to a market rally:

As per July, 2011:
* Cash at higher levels
* margin debt elevated
* Investor net worth remains very low
* NYSE debit balances remain high (correlates with the expansion of margin debt)
* Investor's Intelligence Bull/Bear Ratio still not reflecting extreme pessimism

If traders/investors have increasingly been buying on margin, and have negative net worth (negative available cash), then how can they confidently buy equities in the event of a correction? Now keep in mind the above statistics are illuminating margin speculators and not the universe of investors as a whole (overall investor cash levels are very high). However, could these 'fringe' players adversely effect any downside correction or prolong a market rally as they are prevented from making leveraged purchases on an on-going basis? (since they are already over-extended?). These data points are more relevant and are distinguished from the May 2010 era (characterized by less utilization of margin debt and higher speculator net worth).

Argument for a market rally:

VIX, RSI, AAII, and other technical indicators suggest the market is positioned for a 15% rally off of the 1120 base over the next two months.

Reply:
Is the over-reliance on technical indicators a consensus view? Keep in mind that algorithmic traders base their models on historical examples- if enough of the crowd moves in one way, will the market surprise us by moving in the other direction?

This Cat's Dead But Probably Will Bounce in 100 Days

26 observations since 1960 of SP500 one day selloffs off over 4.5%. There are 5 unique examples of times the market behaved in this manner and quickly reversed without further trauma. Of those, 9/11/1986 and 10/27/1997 and 8/31/1998 seem the most comparable to today. In 1986 and 1997 the market was basically flat over the next year. After the 1998 crash [13.5 % negative], the market immediatly rallied for a month, crashed back to the same level, then resumed rallying until 2000.

Most of the -5% observations were in 2008. As such, based on this data alone the odds of a further 5% depreciation within the next 100 days are roughly 65%.

However, after measuring the 100 day maximum return (the highest the market rallies over the next 100 trading days) the picture is much brighter: of the 26 times since 1960 that the S&P500 has fallen by over 4.5% in one day, the market has reached a maximum average appreciation of 12.4%.

Conclusion: wait on the sidelines for a short while, then consider initiating some medium term bullish trades