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Despite a very choppy, sideways-trading market since mid February, our more intermediate term analysis has consistently indicated that the US stock market was in the latter to final stages of its July 2010 advance.
This week’s failure of bullish chart patterns in both the US and Europe, corroborated by a new bearish shift in market momentum as of the close on Monday and further supported by a 53-year seasonal trend, indicate that at least a near term market peak is in place at the recent highs.
Paris CAC-40 Index
Considering that the US stock market is currently over-extended according to a number of different technical measures, we are expecting an initial, and potentially sharp, 7% decline in the benchmark S&P 500, back to major underlying support at the 200-day moving average.
Since that our May 17th report the S&P 500 has declined by 89 points or -7% to test its 200-day moving average on Thursday June 16th 2011.
Understanding the relationship between investor positioning and the direction of financial asset prices can provide investors with an important edge.
The following (green highlights) is an excerpt from our May 20th Sentiment Survey report, which examines investor positioning in US stocks, US bonds, the Dollar and in economically-influential commodity prices, and points out emerging investment opportunities based on these data.
excerpt from Asbury Research’s Sentiment Survey
The US Stock Market
May 20th 2011
Chart 4 indirectly measures retail-oriented investor sentiment on the US stock market via the
day-to-day flow of investor assets in and out of the money market.
Since investors typically allocate more of their investment dollars to money market funds when they are fearful of a stock market decline, and shift those assets out of these funds and back into equities when they think the danger is over, tracking the day-to-day level of assets in this fund can tell us a lot about the level of greed or fear that investors are feeling about the stock market over the near term.
This 3-panel chart is admittedly a bit complicated, but it essentially defines instances when investor assets are aggressively leaving the money market — presumably in search of a better return
The rightmost red vertical highlight between all three panels points out that that investor assets are aggressively leaving the money market right now, while the other vertical highlights show that previous, similar instances of this have coincided with or led what have been the most important peaks in the S&P 500 (upper panel) since 2010.
During the 3 weeks or so since our May 20th report, the S&P 500 has declined by 76 points or -6%.
Understanding how different financial asset prices interact with one another can provide a big edge to investors. We often consult “Dr. Copper” to get his prognosis on the US economy, because the US stock market moves up and down based on investors’ collective opinion on the economy.
The chart below, taken from our May12th Commentary entitled Recent Weakness In Copper A Red Flag For US Stocks, displays the close and stable positive correlation between COMEX copper and the Dow Jones Transportation Index over the past decade.
These two assets are related to one another because copper is used in manufacturing to make just everything you can think of, and the Dow Transports represent the shipping of those manufactures goods.
COMEX copper, Dow Transportation Index since 1999
In that report we said:
“The big negative divergence between copper prices and the Dow Jones Transportation Index since mid February strongly suggests that one of these two assets is temporarily mis-priced. Based on copper prices’ tendency to lead US equity prices, we believe that the US stock market is the mis-priced, over-priced one — and is vulnerable to an upcoming decline.”
Since that report, the broad market S&P 500 has already declined by 74 points or -5.5% is less than a month, and is threatening to extend its recent lossses.