Wednesday, May 21, 2008

The next selloff begins

Several market sentiment indicators this week returned to the optimistic levels of the October 2007 peak, which is a strong signal that a medium-term decline is on the way. Today the S&P 500 fell 1.6%, passing below the lower trend line of the ascending wedge formation which has been in place since March; such a violation usually heralds a selloff.

Taken together, the optimistic sentiment and trend change are about as strong a signal as you will ever see of an impending decline in the market. Since the S&P 500 closed at 1565 during the previous sentiment peak, but only 1426 at this week's peak, the coming decline will probably take the S&P below the March lows of ~1275.

As before, a slow decline is still more likely than a sudden crash due to record proportions of shares waiting to be re-purchased by short sellers.