#3 Edition: SP500 Quant Market Report, 23rd April 2012

The SP500 experienced a very jittery behaviour the past week. Given the lack of clarity  we decided to stay out and reconsider our position this week. It still holds that medium term fundamentals are still moderately supportive (US 1Q12 GDP figure to be released this Friday; everything ok in the US 1Q results campaign with better comments coming from management teams). This makes it unlikely that this movement morphs into a steep downward trend. We think that a sideways market (not fully consolidated yet) will prevail until investors find clearer clues about whether these fundamentals are here to stay or not. There is a tug of war between fundamentals, decisions/forecasts coming from supranational institutions (IMF), central banks (less dovishness in developed markets), political events (France and Dutch politics) and peripheral issues (Spain and Portugal; watch the Ibex for the opportunity to lock into high dividend yields) 

Long ExtremeStop @  1349.8: comes down significantly from past week's stop but not due to price action. It points towards an increased 'appetite' to endure downward moves in prices in case we decide to go long. Those moves won't be considered abnormal and it therefore follows we won´t be stopped out immediately.

Short ExtremeStop @ 1403.3: very close to last week's stop. We detect a little less 'appetite' for being short.

The widening between stops is nontheless uncomfortable because it points that we should deal with more uncertainty before we know what sort of waters are we navigating. In  this case ExtremeStops signals that if more volatility materializes it won't be easy to decide to which side to tilt.


DPTA comes  again with no clear cut reading (see superimposed red square in the chart below; read note 1 below). It is apparently less mixed than before but still suggesting that a sideways market is on the make with some traces of downside risk. The support might not be completely formed. Although it is a close call, it could happen that the lower bound of the range consolidates below past week's Long ExtremeStop (1362.5) and above the current week ExtremeStop (1349.8).

Conclusion:  

1) keep expecting the volatility typical of a range-bound market,  2) we don't have a lower bound formed yet, 3) expect a weak start this week, with improvements as it progresses 4) seems that downside risk is progressively abating
We were out this untradable market at the beginning of last week. According to our models it is not advisable to make a strong bet yet, so we remain neutral for now. It is worrisome that no blue signals appear in DTPA, meaning there is little room to bet for a recovery up to the top for the moment.


Note 1: Reminder on how to interpret DTPA. The chart provides the probability of a strong movement around the trend for the next few weeks. As you can see it always adds up to 100%. The colours represent how much danger we should expect: light and dark blue are good for those who think they should stay long. Orange and red have the opposite meaning. In between, representing low chances of change in the trend in force (whether upwards or downwards) we have green.
Note 2: we will cover more explanations about DTPA (Dynamic Technical Probability Assessment) and ExtremeStops in our Bits for Thought section 
Note 3: Always keep in mind our disclaimer issued in our first post (31/03/2012)