Wednesday, June 4, 2003 8:45 PM EST
Breadth on the NYSE has now been positive (more advancing issues than declining issues) for an incredible 11 straight days. Other than 12 days in March 2002, we have not seen such a streak since 1995. Just for reference, we have seen the following streaks of positive a/d days since 1965:
| Number of Days in Streak | Number of Occurrences |
| 10 | 13 |
| 11 | 11 |
| 12 | 3 |
| 14 | 1 |
| 15 | 1 |
| 16 | 3 |
| 19 | 1 |
Not only that, the 10-day average of the a/d line is 958 issues - the closest recent figure is 760 in October 1998 (values will differ a bit depending on your quote vendor). If we look at the a/d line as a percent of total issues traded, then we have the most positive 10-day breadth since 1991, at 26% of total issues.
I've been looking at such positive breadth up until recently as a negative for the market. After all, the overriding trend of the market was down, and overbought in a down market is not positive. However, now the trend of the market has changed from down to neutral, and that requires that we take a different look at things. Overbought breadth readings are relatively common immediately after an intermediate-term low. This makes sense, as the buying explosions in the first few days after the low typically record extremely lopsided breadth. However, it is EXTREMELY unusual to see this type of activity so far from a low. In fact, I could only find three other instances since the 1960's where we saw 10-day breadth at 20% or more of total issues, at the same time the market was 20% or more from a low within the past 60 days. Each of the three is shown below, with situations equal to the current one circled in green:
Such fantastic gains and overbought market conditions didn't lead to a rollover in any of the instances. In each case, the market continued higher, albeit in a choppy fashion, over the next few months before resuming the bull move in earnest. The occurrences in 1975 and 1982 marked about the halfway point of the move before a substantial correction of greater than 10% set in. The 1991 instance occurred at about the 40% mark before a setback of around 9% in 1994. If we stretch a little and project this out to our current situation, it would estimate a move to around 1180 (close to the March 2002 high) for this current rally before a substantial correction would be likely.
As another sign of almost-unprecedented buying pressure, the NYSE TICK has seen a reading over +1000 for 24 out of the past 30 days. This type of activity has not been seen in at least five years. Also, if we look at the difference between the daily high TICK reading and daily low TICK reading over the past two weeks, it set a new five-year record today with a reading over 700. Each time this had spiked to 400 or above for the last three years, a market peak was soon to follow, but again this time appears to not be following that script.
With our breadth measurements becoming overbought in an historic way, the sentiment surveys reflecting runaway optimism, and put/call ratios showing divergent opinions between the "dumb" money and "smart money", our intermediate-term "score" for our indicators hit 70% with today's readings. This shows that we are seeing something of a confluence of extreme longer-term readings, though it is not nearly a consensus. Since some of these indicators do not have an extensive history, the score only goes back four years, but today's reading has been exceeded only twice in those four years - the market peak in January 2000 and the peak in January 2002.
I could go on and on about overbought breadth, worrisome put/call ratios, Rydex traders trying to (finally) jump on the bandwagon, low volatility readings, high complacency reflected in the sentiment surveys, etc. But there is nothing new that I haven't gone over several times in the past few weeks, and prices have brushed aside every issue, broken every resistance line, and continued higher unabated. I felt the strongest that we would see a major correction when we reached the 930 level on the S&P, but we are now more than 6% higher, and seeing some things normally seen near the nascent stages of new bull markets. Namely, I discussed the breadth readings above, and the short-selling and Commitments of Traders information several other times over the past couple of weeks. While price itself has not yet confirmed "new bull market" status to me (it would need to make another higher low, then another higher high first), I find it exceedingly difficult to fight the daily trend anymore. While it is true that the weekly trend is now neutral (not up), and overbought conditions in a neutral market still favor the short side, I would hesitate to fight this market until very clear signs of a breakdown become evident. We haven't seen that yet, and I wouldn't risk much more money on the short side unless we see that, or truly euphoric readings from our sentiment measures (not there yet). Nobody is more upset than me at having misplayed this rally so greatly. After a very good 2002, 2003 has been a struggle as far as sentiment and market performance conforming to historical norms. However, I still do not fully believe that entering long-side bets here is high-odds, and would look for some of this optimism to wear off before trying to jump on board.
Disclosure: long OEX puts
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
Monday, June 2, 2003 8:30 PM EST
A few times during the past couple of weeks, I've discussed the large difference in attitudes displayed by retail traders versus more sophisticated traders as encapsulated by the put/call ratios, and I want to touch on the subject again. During the last five days, we've seen these traders go in complete opposite directions as far as their apparent market view is concerned. Retail traders, as represented by the equity-only put/call ratio, have been trading call options with much greater frequency than puts - this is normally a sign of excessive optimism about continually rising prices. On the other hand, options traded on the OEX (S&P 100) index have been skewed heavily toward puts. As traders tend to shy away from selling OEX options due to their American-style exercise, we can be relatively confident that these puts were bought to open and are either a hedge or speculation that prices will decline.
My opinion, based on the historical activity of these traders, is that OEX option traders are infinitely better market timers than their equity-trading cousins. The action over the past week has pushed the five-day average of the OEX p/c ratio to nearly three times that of the equity-only p/c ratio. Relatively speaking, we can say that during the past week, for every 100 equity calls traded, OEX traders only traded 50. In contrast, for every 100 equity puts traded, OEX traders traded 150. This great of a difference has not been seen since the market peak in January 2002. If we take out the longer-term trend in this data by dividing the current reading by its 12-month average, then today's reading has only been approached or exceeded four times in the last five years:
April 1999 - preceded a 6% decline over the next month.
December 1999 - preceded a 9% decline over the next two months.
August 2000 - preceded a 12% decline over the next two months.
December 2001 - preceded a 7% decline over the next month.
Each of these occurrences coincided with the exact market peak, or within 2% of it. While we certainly cannot base trading decisions off the record of only four occurrences, it should at least raise caution flags for those looking for this rally to continue unabated. By the way, it should be noted that the converse has also been effective - when OEX traders are betting heavily on calls while equity traders concentrate on puts, the market consistently does well in the weeks following. The last time we reached such a positive extreme was in late July 2002, and we all know what happened after that.
The Rydex timers have - finally - been warming up to this rally. Our short-term RSI Spread indicator approached extreme overbought territory on Friday, and there is a chance that it will become more overbought after today's numbers are released later this evening. This indicator has had an uncanny ability to pinpoint short-term market swings when it becomes extreme, so we should note the proximity of Friday's reading to "danger" territory. Longer-term, momentum into the bull funds (and out of the bear funds) waned quite some time ago, which doesn't tell us too much, but the low percentage of assets in the money market persists as a trouble spot as it shows that these traders are relatively comfortable with their positions.
Our longer-term measures didn't change much with the most recent weekly releases. NYSE specialist shorting picked up a bit from the surprising drop during the previous reporting period (but public shorting is still quite low, as I mentioned last week). Positioning by commercial traders and small speculators in the full S&P 500 futures contract was essentially unchanged, and while this is certainly not a negative for the market, the fact that traders are just sitting there isn't necessarily bullish either. I've been stressing that this data was very bullish for the market since mid-March (even though I didn't pay as much attention to this sea-change as I should have), but the utter lack of change for the past month is wearing off some of that bullish tint. The sentiment surveys also didn't change much overall, and remain an extremely troubling aspect of current market sentiment (just take a look at the AIM model).
The price persistence we've seen in the major indexes has made mincemeat out of any bearish short-term predictions. Even normally reliable patterns (not just those found during the bear market) have not been effective. This is, of course, another argument that "this time is different", and I believe it is valid. When a market doesn't behave as it "should", it is often sending a strong signal. Also, the S&P 500 has now taken out and held the 955 level I had previously mentioned. For me, this means the larger trend is now neutral, no longer down, and oversold readings should be given as much weight as overbought readings going forward. The next time sentiment becomes exceedingly pessimistic, I will likely be looking aggressively for potential long candidates.
I'd like to announce that beginning very soon, perhaps as early as tomorrow, I will be posting occasional intraday content for Minyanville (www.minyanville.com). Minyanville, founded by the excellent trader Tood Harrison, is a site dedicated to helping all levels of fellow traders along the learning curve, and supporting some great causes along the way. The nominal fee for a "passport" is well worth it, and I suggest you at least check out a free trial.
- Jason Goepfert
Disclosure: long OEX puts, long SMH puts
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
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