Friday, May 18, 2012

OEXA200R Indicator Flashing DOOM for S&P Index (SPY; OEX; OEF)

From Advisor Perspectives:
Is This the Start of "The Big One"?
As regular readers of my weekly update know, the OEXA200R (the percentage of S&P 100 stocks above their 200 DMA) is a valuable metric for accurately assessing the state of the market in order to make profitable trading decisions. That is, whether we are in a bull, a bear or transitioning from one to the other, as well as market volatility and risk within each of those situations.

Historically, when OEXA200R drops to the 65% level it has also given traders a clear early warning signal of impending market corrections. For instance, since the start of the Great Recession in mid-2007, the OEXA200R has dropped to the 65% line on 25 July 2007, 16 October 2007, 6 May 2010 and 15 June 2011. In hindsight, each of these dates turned out to be auspiciously timed exit points preceding major downturns.

On 15 May 2012, the OEXA200R once again closed out the day at the critical 65% level, taken to be the clear early warning of the next major correction. Several questions come to mind. How soon will the drop occur? Will there be any rebound in the market beforehand? How hard will the market fall? And what will the post-correction recovery look like?

If we examine the Monthly OEXA200R chart, notice that during each of the three market recoveries since 2009 the OEXA200R has spent less and less time in the optimal zone above the 65% line — roughly three quarters from July 2009 to May 2010, two from late 2010 to July 2011 and one in 2012. The OEXA200R peaks have also been trending downward.

The recent drop in the OEXA200R has been particularly steep: from 89% to 59% in just the past three weeks, accelerated by the Euro disaster. This leads me to believe that there won't be any cushy rebound in the OEXA200R before the final slide as we had in June - July 2011; the market is going to come in for a much faster, harder landing this time....MORE