Today has been a very large SOS day so far. If that sticks, SPX is unlikely to make new highs in the next few days and likelier to fall. The System Score is actually strengthened today in the bearish camp as long as SPX stays at or below 1859-1863.
The late, great Terry Laundry's T-Theory Confidence Indicator (FAGIX:VUSTX) has basically supported the SPX rally since 2009 with only one major bearish call in 2011 that I can see. For the first time since 2011, 2007, 2004 and 2000, we have a short-term 1+ month divergence in the indicator versus SPX/Dow price-highs and there is also a long-term divergence with year 2000. There were a couple cases I found in the 1990s when the divergence merely led to consolidation or a small drop until the divergence was erased. But, it is interesting to note the last 4+ cases have led to 20%+ drops and have occurred every 3-4 years with this month's divergence and the 2007 divergence creating both short-term and multi-year divergences. This indicator basically speaks to the market's appetite for risk and the negative divergences suggest SPX is too risky and priced too high right now.
When you combine the T-Theory Confidence Indicator with my discretionary spending indicator, my System Score, the Fed wind down and general tendencies for the market to cycle often turning in March/April, there is most certainly a STRONG possibility for an 8%+ drop and likely even a 20%+ drop. Keep in mind, that a drop from 1884 to 1576ish at the 2007 bull market highs would be both a natural breakout backtest some would consider long-term bullish and a 20% correction. That's not an unreasonable projection for the spending-lag bottom expected in late summer. Still, SPX has to break 1840ish. Then, there is good support at 1780ish and 1740ish and great support at 1680ish. Good fortune.
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