S&P 500 Index Update

Over the past five or six months, the broad markets have continued to climb higher, surprising many pundits and economists. When the markets slowly grind higher and bullish sentiment becomes somewhat euphoric (as we saw in the sentiment readings in January), there is a setup for a pickup in volatility. When markets correct to the downside and volatility intensifies, as we have experienced over the past few weeks, the selling pressure can quickly wipe out months of appreciation in the markets; which is why we have been more defensive and cautious since last Fall.

Below is a six month chart of the S&P 500 Index as of yesterday's close. As you can see, we are essentially back to mid September levels in the index, virtually eliminating all gains from the 4th quarter of last year and beginning of this year in just a few weeks - dropping over 8% from this year's high.





Fortunately, there is some good news. First, reported earnings have been fairly positive so far and the economy is improving, albeit at a slow pace; and it's much better than it was last year at this time. Second, this market decline has caused an 180 degree turn in sentiment for both dumb money confidence and smart money confidence. Below is a chart showing dumb money confidence dropping to 46 down from a high of 75, while smart money confidence has risen from a low of 38 to 50; indicating the smart money is becoming more confident in the markets as prices decline. The smart money readings are moving close to the levels from March of 2009. If the markets continue to fall and smart money confidence continues to rise, we will look to become less defensive and more opportunistic, so when the pendulum swings back, we will be on the right side of the market, along with the smart money.