The Stock Market is Evolving

The stock market continues to be caught in the see-saw action that we've witnessed for the last 2-3 months.  January was hot creating that dynamic up-move.  And along with that action, our Psychology Composite got very nervous as the traditionally smart investors like corporate insiders and OEX option traders grew increasingly cautious, while the traditionally dumb investors grew very bullish.

So the evolution of the message from our Psychology Composite moved from that super-bullish P1 that was seen in the depths of the market's despair in October of last year to P5.  It has skipped back and forth over the P4 and P5 threshold a couple of times in recent months, but the core message is that today is not a time to be expecting any immediate upside gratification.  In fact, you can expect a more volatile nervous condition.  Here's today's conditions of our Asset Allocation Model.

However, Psychology doesn't work alone.  It takes two to tango, even in today's enlightened age.  So, as we look at Psychology's historic partner, Monetary, we see that today it has just barely crossed back to that M1 ranking.  It is not a big jump, for Psychology or Monetary, but they are almost in lock-step.  Each time Psychology zigs (or goes backward) into P5, Monetary zags (or goes forward) into M1. 

Yet, the S&P 500 has been kicking and scratching to erase the damage from the financial collapse, since that low point in March 2009.  It managed to move back to the May 2008 level in the rally that created the recent top.  Often, support and resistance points on one side of the bear market look similar to the other side of the bull market.  So the correction now could easily move back down to the black dashed line in the chart below.  It would mean a decline of a little more than 9% to that March 2008 level of 1250.  That would also, almost assuredly, get our Psychology Composite back to a healthier P3 level...and maybe even a P2.

That's my thoughts for this morning.  Our Asset Allocation Model is still very much telling us to stay the course.  We may experience some rocking of the boat for now, but quite possibly, this evolution is going to get back to those "good ole days" before too long.

Don Hays

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