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Friday, May 31, 2002  5:22 PM EST

Please check back on Sunday for the regular weekly commentary.  The CBOE charts and Composite model should be updated by 8:00pm EST, otherwise all other daily charts have been updated as of today's close.  Have a great weekend.

Thursday, May 30, 2002  10:52 PM EST

NOTE:  If you don’t regularly read the commentaries, I suggest you at least check out today’s study of high Composite model readings in the Research area of the site.

Well, it WAS very interesting today, although not like I had expected it to be.  The break of yesterday's lows certainly did bring out some selling, but the S&P and NDX both rebounded nicely.  The STEM.MR model was on a BUY signal at the time, and when it went back to neutral, the indexes almost immediately sold off once again to challenge the day's lows.  Within a couple of points of the lows, we again got a BUY signal out of the STEM.MR model, which is still active, as the model is showing a reading over 90% even with the afternoon rally.  So far the S&P has rallied 9 points from the signal issuance while the NDX has gained 20, but the model has not moved much from where it gave the signal.

The bullish evidence is stacking up…

Some of our other indicators also reached some rather extreme levels during the day today, including the Nasdaq cumulative TICK.  The intraday indicator continues to show highly oversold readings while the daily has now cycled down to below zero.  This general area has preceded some decent technology rallies.

I mentioned yesterday that the STEM model signal line could rally quite a bit today with any kind of a selloff, and it did indeed gain about 10 points.  It is now close to BUY territory and another day of heavy selling could prompt a signal here.

The breadth oscillators are somewhat oversold at this point.  The put/call ratio moving averages and open interest figures are bullish.  The three-day moving average of the put/call rank is now at 86%, which essentially means there has been a high level of put buying this week.  This VIX moved to 12% above its 10-day moving average and reversed.  The TOPM model is falling.

Most significantly, the Composite model is now giving bullish indications.  This is an exhaustive model of relevant sentiment indicators, so to have a reading like we have today takes a broad brush of pessimism.  I suggest you peruse the study now posted on the site in the Research area.  In brief, it suggests that there is a very high possibility of a significant reversal within the next trading month.  After 20 days, there is a greater than 80% chance of the S&P being higher than today, with an average return of 6%.  The average positive return is 8.1% and the average negative return is -2.9% (after 20 days).  What trader wouldn’t like those odds?  Of course, let me interject the usual disclaimer here…these are ODDS we’re dealing with, not certainties.  Not many people trading or investing for any length of time ever said this game was easy.  You may also note that I have changed the bullish and bearish levels somewhat on the graph, and I also adjusted the model itself a bit.  While doing my study, I adjusted them to be more statistically precise.  Since I have not issued any signals based on the prior levels, I thought this would be OK.  You can now see a two-year chart of the model instead of one year in the Models section of the site.

Last week, I posted a study of the high (bearish) cumulative TICK reading we had and how that lead to a high possibility of a DOWNSIDE move within 30 days.  Well, we’ve pretty much already satisfied the average return of that “signal” with the decline we’ve experienced since I posted the study.

The bottom line is that I am now very bullish on the short- to intermediate-term prospects for the S&P and Nasdaq.  I can very easily see a 5-8% upside move over the coming weeks, which interestingly enough would take us close to the recent highs.  Should we instead head lower from here, I’m certain that my bullishness would grow exponentially.

Wednesday, May 29, 2002  9:26 PM EST

I mentioned yesterday that any further selling could push several of our indicators and models into bullish territory, and we got very close today.  The STEM.MR model, of course, did get firmly into BUY territory, and you should have received a signal via email.  We've now been above 90% in this model for 23 out of the past 26 half-hour periods (which is about two days).  That's very rare, as that kind of persistent short-term pessimism has only occurred a couple of other times in the past two years.  All lead to at least a very short-term rise in price.

The STEM model also is beginning to make a move toward bullish territory, with the fast line almost making it there today.  The signal line is still in neutral, but will be dropping six low readings during the morning tomorrow, so a continued market drop could really push this model up there.

Most importantly, the Composite model is on the cusp of BUY territory, with a reading of 69.  This model has made a large move in the past two days.  We would NOT be this high if we didn't have a wide range of sentiment indicators giving very high readings.  One more day like today could easily shove us into a BUY signal here, which would be significant in my book.  I thought a break of the recent lows would be necessary to get a BUY here, but that may not be the case.  There are some longer-term indicators that are not quite where they "should" be for a good bottom, but this week has added to my bullish stance considerably.

The Nasdaq cumulative TICK indicator is now extremely oversold, after reaching close to -4000 this afternoon.  These readings have served as very good long entries over the past year, at least for a short-term bounce.  The daily cumulative TICK indicators have come off of their overbought readings, and in fact the Nasdaq daily is even getting close to oversold as well.

I mentioned yesterday that even a moderately low number today could push the advance/decline average into oversold and bullish territory.  We got a rather large negative reading today, which places the average in the bottom 10% of all readings over the past two years.  That's quite oversold and has lead to some decent short- to intermediate-term rallies in the past couple of years.

One other thing of note today is that we had a very narrow-range day in both the S&P and Nasdaq.  For both indexes, it was actually the fourth-narrowest range day of the past two years.  I'm talking about true range, which includes opening gaps up and down.  I've touched on this before, but this type of action is significant because it often is a precursor to explosive moves one way or the other.  Some large traders tomorrow will use a decisive break of today's high or low to initiate long or short positions respectively, so it pays to be aware of that pattern.  Which way we break could determine our short-term (<5 days) direction.

On a side note, check out the Lowrisk.com and Neuer Market sentiment surveys in the Indicator section.  They're not saying a whole lot right now, but they are two more effective tools to add to our arsenal.

I will be watching which way we break tomorrow very carefully.  Pay close attention to today's high and low, since as I mentioned it could auger a large move in either direction.  I feel that sentiment is now in a place where a decent short-term upside move could happen (although the longer-term outlook is still in question), so a break of today's high will have me looking to the long side.  A break of today's low could have us seeing the recent lows being challenged instead, setting us up for a longer-term bullish condition.  At 10:00am EST, the Chicago PMI report is released (correction: this report is released on Friday, May 31st), so that in addition to the weekly jobless claims report could spark a sharp move after the initial fake-outs.  Stay sharp - it could get very interesting.

Tuesday, May 28, 2002  8:30 PM EST

The market couldn't hold on to early gains on mixed to positive economic data, which would have been a major negative had the news been more upbeat.  We'll get more chances Thursday and Friday to test the market on the economic news front.  After selling off a bit hard once breaking last week's lows, the S&P and NDX both found some bids not far below, although volume was once again anemic.  The selling near the lows made the STEM.MR model rise up to BUY territory, where we issued a signal around noon (EST).  Not long after, the markets rose enough to bring the model back to neutral before selling off a bit once again.  Here's the most interesting part - as the markets rose for the remainder of the afternoon, so did the STEM.MR model, finally closing at 92%.

That rise in the STEM.MR model occurred simultaneous to CBOE put/call readings over 1.00.  That's a rare occurrence (it's happened a half-dozen times in the past couple of years).  However, I'm not assigning the weight to that reading that I normally would, as the other options gauges - the VIX and TOPM - didn't show much fear at all.  In fact, the TOPM model actually ROSE today, and quite a bit at that - which suggests calls were getting bid quite heavily, at least towards the close.  The table below shows what happened over the past two years every time the CBOE put/call ratio went over 1.0 on a closing basis: 

You can see very generally that when the p/c ratio was high along with the VIX, the returns were better than when the VIX didn't rise along with the p/c ratio.  The one exception of course is late August 2001, when the terrorist attacks affected the 20-day return.  The days immediately following 9/11 are lumped together since they occurred simultaneously.  There aren't enough samples from which to draw any meaningful conclusions, but it should be noted that such a high p/c ratio didn't necessarily translate into big returns, but when accompanied by a relatively high VIX, the chances of a short-term bottom seemed better.

One point in favor of the bulls today is that the OI-P/C spread dipped below zero.  I've noted in the past that this is a significant occurrence, which you can plainly see on the chart in the CBOE Ratios section of the site.  The best signals seem to come when there are multiple days below zero, which will be difficult this time around since the OI ratio is around 1.0.  So we would have to have another extremely high p/c reading in order to get another below-zero day in the spread.

The intraday cumulative TICK indicators have given superb short-term tip-offs lately, and at this point they're neutral to slightly bullish.  Continued downward pressure tomorrow could have them firmly in bullish territory.

The other breadth ratios are neutral to slightly bullish, especially the NH/NL ratio.  The A/D ratio will be dropping a very large positive number tomorrow, so a moderate to negative number there tomorrow could drop this indicator into very oversold and bullish territory.

The Composite model gained 14 points today to 59%, which is one of the larger one-day gains in that model.  Any further selling accompanied by a rise in the fear gauges could actually push this model into the BUY zone later this week.

Although we have quite a few short-term positives tonight, I don't think it's nearly enough to assume a change in the intermediate trend is imminent.  I think there is certainly room for a short-term relief rally, maybe even taking us back up to the most recent highs, but sentiment is not yet in a place from where past solid bottoms have launched.