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Wednesday, October 30, 2002  11:21 PM EST

There's not a whole lot to go over tonight besides what was mentioned in the intraday comment.  Our intermediate-term indicators remain neutral to overbought, seasonality is positive, and our shortest-term indicators are neutral to overbought.  An overbought condition in the context of a pronounced daily (or weekly) downtrend while bumping up against resistance suggests caution is warranted on the long side, and in fact strength could be looked at in terms of setting up potential short candidates.  However, the seasonal strength should not be discounted.  These crosscurrents - and the fact that all four sentiment models are currently neutral - suggests that positions should be kept light until a more defined edge can be determined.

One thing I want to quickly touch on is the Investor's Intelligence survey, which showed a surprising amount of bullishness during the latest reporting period - greater even than the lowrisk.com survey released on Monday suggested it would show.  Bulls increased to 43.4% (from 40.8%), bears dropped to 28.3% (from 35.7%) and correction increased to 28.3% (from 23.5%).  While I don't consider the "correction" responses in any of the ratios I look at, as I've stated before it really could be considered bullish.  Traders put in that group expressed a positive outlook, with the probability we would first have a correction.  If we compute a "long-term bull" from this data, then we could say that 71.7% of the respondents were bullish, which would be the largest percentage since the peak this past January.  As it stands, the traditional bullish ratio (bulls / (bulls + bears)) has jumped to 60.5% from 39.7% two short weeks ago.  This is the largest two-week jump in bullishness in 15 years.  The average change in the bullish ratio in this survey when we have a three-week increase in the S&P of greater than 8% is +8%, so the current jump is obviously quite unusual.  As I alluded to on Monday, the psychology has shifted from a theory of lower lows to one of an intermediate-term uptrend, with only a slight pullback suspected.  I don' t necessarily buy the surface argument that this is an exhibition of too much bullishness just yet, as this type of attitude is very widespread and could turn into a self-fulfilling prophesy.  I think as long as we hang on to at least 50% of the gains from the 10/8 low, the bullish argument stands.

On a side note, I want those currently on a free trial to know that sometime in November, I will be requiring a valid credit card to sign up for a free trial.  I have had an overwhelming number of trial requests lately, and a large number of them are requests from those currently on a trial.  I understand that with the rates increasing on Friday, there is a greater impetus to keep signing up for free trials, but when a credit card is required, I will be strictly enforcing the "one trial" policy.  I wanted to mention this now so that those of you who have had multiple trials understand that I am not trying to "railroad" you by requiring a credit card after I raise the rates.

Tuesday, October 29, 2002  8:40 PM EST

A subscriber asked me to look at market performance near the open versus near the close to check on the well-worn market axioms "strong markets close well, while weak markets close poorly" and "dumb money buys the open, while smart money buys the close".  The following series of charts looks at the actual close-to-close performance of the S&P 500 (black line) versus the performance during the opening (red line) and the performance during the closing (green line).  For example, the red line shows the performance of the S&P in the first 30 minutes of trading only.  Anything that occurred after those 30 minutes is deleted.  The green line shows how the S&P 500 did during the last 1/2 hour only and takes no other time of day into consideration.  On any given day, if the S&P rallied 20 points up until 3:30, then dropped 7 points going into the close, the green line would show a drop of 7 points.

Here are the same charts, showing only the past year of trading:

I think the period from 1998 - early 2000 could be considered a strong market, while obviously 2000 - current could be considered weak, so we have a good sample to work with here.  Here are my observations:

1.  STRONG OPENS AND STRONG CLOSES ARE GOOD.  The period from late '98 - late '99 was incredibly strong, and it was characterized not only by strong closes, but also strong opens.  In fact, the S&P (close-to-close) gained about 33% in that time frame.  The "close-only" S&P gained 14% while the "open-only" S&P gained 21%.

2.  WEAK OPENS AND WEAK CLOSES ARE BAD.  When the market both opens and closes poorly, it tends to coincide with a very weak overall market.  While this is a kind of a "duh" observation, one interesting aspect is that the market does not seem to be able to muster much of a rally at all when both ends of the trading day move together.

3.  DIVERGENCES BETWEEN THE OPEN AND CLOSE PRECEDE VOLATILITY.  The best example of this is the topping process in 2000.  The open-only S&P kept making higher highs while the close-only began making a series of lower highs, causing a divergence between the two.  The result was a series of violent swings in both directions until the ultimate breakdown occurred and the open-only S&P started to make lower highs.

4.  NEITHER OPENS NOR CLOSES SEEMS TO HAVE A PARTICULARLY GOOD FORECASTING ABILITY.  While both at times can give a heads-up to future moves in the actual index, it does not seem to be consistent enough to provide a base for solid decisions.

5.  DIVERGENCES BETWEEN THE CLOSE AND ACTUAL CAN PROVIDE CLUES.  When the actual index makes higher highs or lower lows but the close-only index does not confirm, it often leads to a short-term contra-trend correction.  One example of this is the October 2001 - January 2002 period which saw the S&P make higher highs, but the close-only S&P make a series of lower highs.  This lead to the swoon into late February.

So where are we now?  Actually, it looks pretty positive.  Although the open-only S&P has taken a bit of a breather during this consolidation, the close-only has continued to march higher.  This may be the beginning of a divergence between the two, and as I stated above, divergences tend to precede a period of extreme volatility.  While it is still early to declare a solid divergence, it is something to keep our eyes on.

I stated in the intraday update that most of our shortest-term measures had cycled back down to oversold (or nearly so), so there was some support for those looking for an upside trade.  We got that upside in the afternoon, and it was enough to relieve the oversold condition in each of the indicators.  We enter tomorrow with a mixed bag on short-term indicators.

Longer-term, there are a couple of signs that urge caution.  I mentioned the Rydex asset flows last night, and continue to believe that that complex is showing too much optimism to suggest a large upside move is imminent.  The composite chart of the asset flows on the site (which I pointed out this weekend) continues to get more extreme by the day, and it has not boded well for the market during this bear.  Also, the 10-day averages of the equity and total put/call ratios are beginning to approach their lower standard deviation bands.  It is very clear from the charts on the site that during this bear market, whenever these ratios approached that band, a short- to intermediate-term high was close at hand.  While we're not quite at a point that I would consider dangerous, we're getting very close.

I mentioned the apparent optimism shown by institutional investors in the OEX and S&P 500 options yesterday, and that "trend" continued today.  The OEX put/call ratio registered a relatively low reading of .91 today, while the S&P 500 put/call bid/ask bias ratio came in at 2.36.  Both of these are on the bullish end of neutral, and suggest that there will be a solid upside attempt sometime this week.

There are a lot of crosscurrents at the moment, and I don't see a solid edge in either direction.  The positives I mentioned over the past couple of days are still with us, but now we have broken some trend lines that may embolden short sellers, at the same time that we remain somewhat overbought in the intermediate-term.  This is the kind of environment where I trade very lightly no matter the direction until I see sentiment tipping too far to one side.  We saw that this morning, and it lead to a decent move higher in the afternoon (for very short-term traders, anyway).  Until we see an extended trend in either direction, I'm afraid we will not see a solid edge emerge for more than a short-term trade.

Monday, October 28, 2002  8:23 PM EST

In the weekend commentary, I noted that since a plethora of indicators and models were neutral, so was I, which dictated going with the trend until such time as sentiment (in whatever time frame) reached one extreme or the other.  For those of you who receive the intraday updates, it was clear that we had reached an overbought situation in our shortest-term indicators, and as I mentioned I had a short bias (although I suggested keeping it light).  The decline going into the afternoon session served to alleviate that overbought condition.

The NYSE cumulative TICK went from +6160 at the close on Friday to +1118 today, a change of -5042.  Although not oversold, it is approaching that level, and in a strong uptrend that's all it takes sometimes to re-fuel the drive higher.  You can see from the chart below that since the 10/8 low, when the TICK relieved its overbought nature, it resulted in a quick resumption of the uptrend.  There's no telling if this time will be different, but I assume it will not be until it is.

The CBOE equity put/call ratio was low but not to a troubling degree today, but the OEX p/c ratio was extremely low as the index options traders increased their call buying significantly while the put buying stayed tame.  I don't place a lot of weight on individual readings, but it is the first really positive sign from this group in nearly two months.  Lending credence to today's OEX reading is the action in the S&P 500 options.  Our put/call bid/ask bias ratio closed at 6.16, which is one of the more bullish readings we've seen over the past few months.  Here is the breakdown:

In the back months, 41% of the calls went off at or above ask while only 9% went off at or below bid.  This suggests a bias towards buying calls, and has generally proved to be a positive sign from 1 to 3 days out, especially considering that back month call volume was the heaviest in over a week.

In the intraday note, I mentioned the lowrisk.com sentiment survey that came out today for the reporting period which encompasses last week.  The survey showed a substantial shift from the bullish camp to neutral, and only a slight uptick in bears.  This fits well with much of the anecdotal evidence that I've been reading where many traders are expecting a simple correction and not a full-fledged test back down.  As I've alluded to several times, this survey will often give us a heads-up as to developments in the more popular surveys which aren't released until later in the week.  This is not particularly bullish or bearish, but it does give some solid evidence that the psychology of market participants has changed from expecting lower lows to the realization that we may be in a long-term uptrend.  I won't find this especially bothersome until the bullishness becomes frothy once again.

Today's activity didn't change the situation we have been in for a week.  This channel should certainly break this week, and we will know whether we are going to challenge the August highs or drop considerably lower.  From a sentiment perspective, we are in the same position we have been in the last few times price came down to touch the lower 30-minute trend line.  Each of the past times of course, we rebounded to challenge the previous recent highs, and there's no reason to believe this time will be different unless the trend line is clearly broken to the downside.

- Jason Goepfert