Short-term Outlook (1-5 Days):  Neutral  From May 25, 1049 SPX

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Equity Indicators - Updates and Extremes

Individual Investor Asset Allocation

Yesterday, we looked at the investment allocations of individual investors as polled by the American Association Of Individual Investors (AAII).

The May market crash apparently scared quite a few folks, as their allocation to stocks dropped 15% from where it was in April.  That was the 3rd-largest one-month drop in the survey's 23-year history.

Let's go back and look at how the S&P 500 has fared after other one-month declines of -10% or more in individuals' stock allocation (note for the anal-retentive: dates and prices are calculated from the Friday prior to the actual release of the monthly data).

The shorter-term results were fairly positive.  The S&P was up 10 out of 14 times, and three of the losses were under -1.5%.  There was really only one major failure.  Any upside edge, however, dissipated after that.

So there is some precedent that the recent dumping of shares by these guys is a modest positive factor when looking over the next several weeks.

Now let's flip it around and look at the other extreme - one-month jumps of +10% or more in stock allocations.

We have the opposite scenario here, but not quite as dramatic.  The shorter-term results were mostly negative, though there were five cases where the S&P jumped more than +2% over the next month.  After three months, the returns were excellent, with an average return of more than +7% and only two negative results (though they were large losses...).

Three Month Low Then Two Up Days For The First Time In A Month

Everything we've looked at over the past week has suggested the low, for now, is most likely in.  We should see rising prices over the next several weeks.

The studies we've looked at on the site are not cherry-picked because they happen to support that outlook; rather, the outlook is generated because of what the studies have suggested.

Unfortunately, we now have a price pattern that doesn't support that outlook, and it has been quite consistent when it's happened in the past.

Here's the deal.  The S&P 500 hit a three-month low recently, then finally scored two consecutive positive days for the first time in over a month.  Many take that to mean that the downtrend is definitely over, since the pattern of selling pressure has finally been broken.

Historically, however, the exact opposite is typically the case.

The table below shows all instances since 1928 when this has occurred, along with the S&P's performance going forward.

Across every time frame, the results were negative, especially in the 1-month time frame that I've been looking at as most likely to show a positive return now.

I don't like this one bit, but I can't explain away the implications.  It's bearish, pure and simple.  It is not a good price pattern.  The persistency of the decline that we've seen, leading to a multi-month low, has usually resumed very soon after scoring two straight up days.

There were a few exceptions.  In June 1930, March 1935, August 1973, March 1982 and after 9/11, any short-term weakness was quickly reversed and we saw decent gains over the next several weeks.  Pretty much every other instance, in a word, sucked.

I'm a weight-of-the-evidence kind of guy, so given everything we've looked at lately, I'm still inclined to stay with the outlook for higher prices over the coming weeks.  But I will not be sticking around if recent support fails to hold.

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