We are currently at an important juncture for AmalgaMood’s Mood Index. Due to its distressed nature, it merits very close attention over the coming weeks as it could invert to positive, signaling a window of opportunity to re-enter the global equity markets. Conversely, if the Mood Index continues to trend down from already distressed levels, the current global equity prices, many of which are near their 52-week highs, will not be sustained. Either way, the sideways equity price consolidation is not sustainable.

The trend of the Mood Index has been down since February 25, 2011. Since that time the S&P 500 index has essentially treaded water, as seen in the chart below:

Using data from daily closes, the S&P 500 index has at most fallen 4.8% from February 25, 2011 and risen 3.3%. In other words, the stock market has essentially moved in a sideways movement since the Mood Index began trending down. As of the close on July 8, 2011, the stock market was 1.8% above the February 25, 2011 close.

To this point, inversions of the Mood Index have timed important transitions of the stock market very well. In fact, investors following the Mood Index would have stayed out of the entire 2007 – 09 bear market and re-entered very near the actual stock market low. Mood Index inversion signals are superimposed on the S&P 500 index in the following chart:

The inversion signals highlighted important transitions for the stock market. For instance, just prior to the beginning of the 2007 – 09 bear market, the AmalgaMood Mood Index warned of a potentially dangerous turn. Then, soon after the actual low in March 2009, it signaled the potential for a rally due to improving social mood. The most recent inversion signal would have kept investors out of the stock market during the difficult sideways market. For more aggressive investors, they could have taken this negative inversion signal as an opportunity to short the market.

After more than four months of trending down, there are signals of a potential upward turn. Using historical inversions as examples, we can see that four months would be relatively short in terms of duration. The previous positive Mood Index trend, which lasted from late September 2010 to late February 2011, lasted just over five months. Judging from its duration a conceivable inversion is on its way.

However, previous negative Mood Index trends lasted for much longer periods — averaging over a year for the negative trends beginning in mid-2007 and late-2009. This would place a potential positive Mood Index inversion in 2012.

An additional sign that an inversion could be coming soon is the depressed nature of the Mood Index. When broken down by region, Europe’s Mood Index is approaching levels not seen since the March 2009 low – as the global stock markets were making their stock bear market low. It would not require much from such depressed levels for a positive inversion.

The current situation is a bit unusual in the sense that the Mood Index has been deteriorating for a good amount of time, has reached distressed levels, BUT the global stock markets are still very strong. Many global markets are in fact extremely close to their respective 52-week highs. The next move of the global stock markets, considering this significant divergence between Mood and price, could be dramatic.

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