Monday, November 15, 2010

The Will Robinson Signal

With investors extremely bullish and company insiders extremely bearish and with the indicator constructed from the trends in gold, crude oil and yields on the 10 year Treasury flashing extremes, I am once again reminded of the robot from the hit 1960's TV show, "Lost In Space".  When the boyish Will Robinson was in peril, the robot would fling his arms up and down and announce in robot voice: "Danger,Will Robinson, danger!"  Historically, these set of market conditions should not be ignored.  If the market hasn't topped out already, it should do so within a couple of percent of the recent highs.  Rallies should be sold and stops tightened up.  The market is prone to sudden sell offs.  There will be better risk adjusted opportunities to buy in the future.

I first mentioned the "Will Robinson Signal" on March 5, 2010, about 2 months before the flash crash and prior to the late Spring intermediate term top.  This signal uses the combination sentiment indicator and the indicator constructed from the trends in gold, crude oil and yields on 10 year Treasury bonds.  As chronicled in this week's sentiment round up, sentiment is pretty bullish.  Long term yields, gold and crude oil have been pushing higher to such a degree that a sell signal was generated 2 weeks ago in one of our S&P500 models.  In any case, the combination of these two factors has me thinking like the robot: "Danger,Will Robinson, danger!".

Figure 1 is a weekly chart of the S&P500.  The red dots over the price bars identify those instances when this "Will Robinson" signal has been in effect.  Unfortunately, I only have data for the combination sentiment indicator going back to 2004.  Even though the market did go higher in some instances, I can easily state that the best returns are behind us.  In addition, the market is prone to severe sell offs, and yes, there will be better risk adjusted opportunities in the future. 

Figure 1. S&P500/ weekly

And for those of you with 6 minutes to spare, here is a clip from "Lost in Space".

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