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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 461404  
Subject: Control Panel: Oversold? Date: 11/19/2012 2:20 AM
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I posted a short Control Panel on Friday morning.
http://boards.fool.com/control-panel-risk-off-trade-30384991...

I concluded that the SPX was a falling knife that had further to fall.

Brian (sitkapacific) concurred and posted a chart.

http://stockcharts.com/h-sc/ui?s=$SPX&p=M&st=1994-06...

jgc123 wrote, "For a possible contraindicator to your indicators, the vanguard utility index, vpu, just bounced off of its 200 day average like it did in August of 2011."

Brucedoe wrote, "I expect this to continue until a solution to the "fiscal cliff" becomes apparent."

qazulight wrote a post analyzing the technical patterns (head and shoulders) and said, "All I am looking for is a nice bump to enter some more short positions."

The reason I post the Control Panel weekly (not daily) is to focus on signal, not noise. To bring out the signal even more, here is the 40-year chart of the SPX (courtesy of Dr. Mike Klein). The Y axis is logarithmic, so exponential growth shows as a straight line.

http://invest.kleinnet.com/bmw1/stats40/%5EGSPC.html

As all METARs know, the SPX bull market started in 1982, after Fed Chairman Paul Volcker raised Treasury yields and broke the back of inflation during the 1980-82 recession. The chart shows this clearly.

The big drops are the bursting of the tech stock bubble in 2000 with the bottom set in March 2003 and the 2008 financial crisis with the bottom set in March 2009. After that, the SPX had diminishing setbacks in 2010, 2011 and 2012 due to the European debt crisis that was aggressively handled by the troika in Europe.

Seen on this long-term chart logarithmic, the current market drop is minor.

Over the past 4 years, the entire stock market has been stalked by the fear of crisis and extreme drawdowns.

If only we could get back to "ordinary" times (non-crisis), we could talk about the natural business cycle and whether the U.S. is entering another recession that would cause a normal (nasty but not crisis) short-lived bear market, like 1980-82 or 1987 or 1990 but not a bubble pop like 1974-75 (popping of cheap energy bubble) or 2000 (popping of tech bubble) or 2008 (popping of real estate debt bubble).

Currently, Corporate Profits After Tax is at an all-time high. The S&P 500 P/E Ratio is close to the long-term average, which is reasonable if corporate profits remain at this level but will be too high if corporate profits revert to the mean (as Dr. John Hussman repeatedly warns).

http://research.stlouisfed.org/fred2/series/CP
http://www.multpl.com/

The "mungofitch lagged Moving Average" shows that the smoothed daily MA has declined below the lagged MA. Looking at the 3-year chart shows that this was a bearish signal in 2010 and 2011, but was actually a buying opportunity in 2012 since the Macro uneasiness was rapidly contained.

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=1&m...

http://stockcharts.com/h-sc/ui

I don't see indicators of system-threatening crisis, so the question is: Is the U.S. entering a classic recession?

The Leading Index for the United States has been slow but stable growth for the past 2 years and more. The Smoothed U.S. Recession Probabilities is increasing but still low. Payrolls, Real personal income excluding current transfer receipts, and Manufacturers' New Orders are rising (or at least not falling). Commodity prices are falling recently, but are within their broad post-crisis channels.

ECRI has said that the U.S. has been in a recession since June 2012. However, there doesn't seem to be any recent marked deterioration.

It is possible that the SPX is oversold or fairly close to being oversold -- if holiday sales are strong and the fiscal cliff is handled well by Congress (doesn't matter if it is postponed as long as it is handled smoothly without partisan gridlock). If these turn out well, the SPX could have a nice bounce.

What could cause a 2010-style drop below mungofitch's MA line? Nasty fiscal cliff stalemate in Congress, a sudden economic deterioration into recession and/or a sticky default crisis in Europe.

Any of these could happen...but I don't think the probability is more than 50-50. Would like opinions from METARs.
Wendy (see data below)

http://stockcharts.com/freecharts/candleglance.html?$INDU,$S...

http://stockcharts.com/freecharts/candleglance.html?$IRX,$US...

http://research.stlouisfed.org/fred2/series/USSLIND
http://research.stlouisfed.org/fred2/series/RECPROUSM156N
http://research.stlouisfed.org/fred2/series/PAYEMS
http://research.stlouisfed.org/fred2/series/PIECTR
http://www.businesscycle.com/
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