WEEKEND EQUITY MARKET COMMENT PART I - 1/26/2008

I thought I would start out this weekends update with a very interesting occurrence that is based on bullish sentiment levels and has shown some very consistent results.

Over 10 years, the sentiment level on the S&P 500 has dipped below 20% three times, not including the most recent move below 20 we had last week.

Each time this occurrence has happened and the sentiment turns back up as it did this week, the S&P 500 has rallied 24% from low to high. This would bring the index back to its all time highs at 1574 so this would hardly be considered a remote incident.

This is yet another indication of an intermediate term low having been put into place.

There is also another very interesting pattern that takes place in this situation and you can see it on the chart below.

Marked by the blue lines are when the sentiment turned up from below 20%.
The 24% number is the rally from low to high that materialized.

Now, after the 24% rally had run its course, what did the market do next!

Well, in two of the occurrences the market went on to make another new low and in the last incident, the market tested the lows and came very very close to the low level.

So, if things are to pan out much the way this pattern dictates then we should be in a fairly sizable rally phase, but know that once this rally phase is over with a move back up to the old highs that the market has a very high probability of moving sharply lower yet again.

We are starting to get some weekly confirmations of an intermediate term bottom being put into place, with the Russell 2000 giving a weekly buy signal on the stochastics.

Notice also the red line at the bottom of the chart which shows small speculators selling short like no tomorrow and we know that the little guys are typically very wrong at major turning points.

If this intermediate term low holds and continues to be confirmed then look for the Russell 2000 to lead the pack in performance.

The Mid Cap 400 has some of the same characteristics of the Russell 2000 so it looks to me like this next move higher will be led by the smaller companies.

The S&P 500 weekly did not give a weekly buy signal on the stochastics, but the RSI gave a very strong indication of a major low being put into place.