2012: Key market studies that point the way

Although, macro economic analysis is not my niche, Doug Kass makes the argument that the European economic dilemma is a very well known quantity which the market’s have had plenty of time to digest, and he argues Bear Market’s normally occur from the introduction of unforeseen negative economic variables. Although Bears will argue there are additional unknown and negative European developments on the horizon, my contrarian nature gravitates toward such logic.

There is some speculation there will be another round of coordinated Fed Easing in the First Quarter. My analysis of interest rate/equity market correlations suggest higher rates from extremely low levels are generally very conducive for higher equity prices, as fears of the potential deflation, which induced the extremely low rates, dissipates. I believe any such additional Fed easing will continue to hint at panic, and to the contrary, I am of the opinion, if the 30 year bond yield could make its way back to 3.5% on its own this year, the S&P would likely breathe a sigh of relief and visit all time highs in 2012. The current 30 Year Bond yield is 2.919%.

As I was attempting to refine my 2012 outlook today, I felt compelled to peruse my Fourth Quarter commentaries and revisit those studies which appeared to have intermediate implications into next year or were simply a cut above the rest. Since I have those studies at my fingertips, I thought I would pass them along again today in their original form with an additional reference to that day’s S&P price in the heading. The thought that I carried away from the review exercise reinforced my perception that, at least from a tape perspective, the combination of the various early October tape thrust off the retest of the August 8th Low, and the strong net Fourth Quarter, likely puts the odds in the favor of the Bulls as we head into 2012.

October 6, 2011, A PTA7 Volume Thrust Signal, S&P = 1164.97

UDT2= UPVOL/(UPVOL+DNVOL), over the last two day on the S&P 500

UDT2 had been over 89.2 each of the last two days, giving the model a PTA7 volume thrust signal. These signals are 25-0 six months later for a median six month gain of 17.12%.

October 10, 2011, An S&P 500 Five Day Breadth Thrust, S&P=1194.89

ADT5 registered a 78.59 today, the twenty second 75+ reading on the S&P since 1970. The 20 signals, which have expired, were 19-1 a year later. The last two signals are less than a quarter old and are still under water, which brings into question whether High Frequency Trading, etc, has altered the signal’s reliability. You can see they occur much more frequently now. Of course there, is still nine months remaining on the last two signal’s shelf life and they have time to turn their fate around. The last two columns contain the max drawdown and drawups obtained over the following year. The maximum drawups are very impressive, with 14 of the 20 signals up at least 20% at some point in the following year.

The eight ADT5s > 75 which reversed an ADT5 of < 35 in the previous five days were 8-0 one year later for a medium return of 21.04%.

October 12, 2011, Four 1% Positive Price Moves in Five Days, S&P = 1207.25

The S&P finished 25 cents short of posting its fifth 1% gain in seven days and would have presented me with a very impressive tape study had it done so. I considered presenting it as Five 0.99% days out of seven, but for some reason, that seemed like a bit of a push. But regardless, backing up a couple of days, from last Tuesday through Monday, we posted four +1% S&P Days out of five trading days, which has a pretty solid record of calling intermediate moves. Since this study doesn’t require market internals, I took the scan back to 1950. From an intermediate perspective, a couple of the data points could have been considered repeats. Ten of the 15 data points were followed by 20% years.

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