Friday's Trading Should Set Tone for Weeks
Thursday, December 2nd, 2004 8:30pm EST
(Intel)ligence Gap
Bottom Line: Intel’s history of gap up opens after the Nasdaq is already at a new yearly high is not exactly inspiring. The chances for this being an exhaustion gap appear high.
There was significant attention focused on Intel’s update after the close today, and apparently traders like what they see. At the moment, INTC looks like it will gap higher by nearly 8% tomorrow morning. I have mentioned before Intel’s role as a possible bellwether for the broader market, and it’s time to look at that again.
Going back to 1986, there have been 36 instances when INTC opened for trading more than 5% above its previous close. That day, the Nasdaq 100 (NDX) finished higher by an average of nearly 4%, and 86% of the time it closed in the green. However, those statistics exclude times when the NDX closed at a new yearly high the day before. When we look at those occurrences, things change.
When the NDX closed at a new high yesterday, then INTC gapped up by 5% or more this morning, then the NDX closed positively 3 out of 6 times, and the average return was 0.7%. The S&P 500 fared worse, closing positively only once. Obviously, that’s significantly different than the nearly 4% gain seen if the NDX wasn’t at a new high. Looking out three days later, the NDX was higher 2 out of the 6 times, and the average return was actually a negative 1.6%. The average return was still negative up to 10 days later.
The probable explanation for this is that since the NDX closed at a new high the day prior, then INTC comes out with some good news, we may have already had much of that news priced in, and are primed for a “sell the news” reaction to a large gap up opening. This is clearly demonstrated by the last occurrence, on October 15th, 2003.
On October 14th last year, the NDX had scored a new 52-week high. After the close, Intel reported better-than-expected earnings and upped their estimates for the fourth quarter. The next morning, the stock gapped up by over 5% and prompted the NDX to open higher by 19 points along with it. That open proved to be the high point for the next couple of weeks, as the market immediately sold off and lost about 3.5% over the next 8 days.
All occurrences are different from each other and do not match exactly. Last October, INTC had been on a steady rise for nine months. This time, it’s about the exact opposite, although the stock has already rallied more than 15% over the past two months. If the NDX is able to gap higher and maintain a trend day up (meaning it opens at the low, closes at the high, and the TICK spends little or no time below zero), then I would back off the idea of trying to short this market any time soon. On the other hand, there appears to be a good chance that this type of gap is too much with the NDX closing at a new high today, and the odds of a failure are high. I have showed before the stats regarding gaps and how they tend to get filled within a few days. If the current gap in the futures holds, then there is a good chance that this one will be too.
Conclusion
I mentioned the ISE Sentiment Index last time, which measures how many calls traders are buying as opposed to puts. The Index continues to remain very high, and has now averaged more than 200 over the past 10 days. This is only the fifth time we have seen such confidence from these traders in the past two years. The only time it did not result in at least some short-term weakness was mid-December of last year. While it is a similar time frame, as I noted last time there is a big difference between early December and late December. These same readings I would tend to ignore towards the end of the month – toward the beginning, it is a definite reason for concern.
There certainly seems to be an anguish in not being invested. Assets in the Rydex money market fund are at their lowest point in absolute dollars since March 2002 and as a percentage of total index assets (which is what is posted to the site) since February 2001. According to the latest AMG data, investors once again poured nearly $4 billion into equity mutual funds this week. Over the past four weeks, a cumulative $13.6 billion has been invested, a sum matched only by the late January – early March period earlier this year.
The market is overbought by many measures. Looking at a long-term 60-day average of the TRIN on the Nasdaq, at a current value below 0.90 it is the lowest since August 2000. While shorter-term moving averages have become as low as they are now during the rally over the past two years, they have invariably coincided with at-least short-term weakness in technology shares. Many of the sentiment surveys we follow are also at nosebleed levels. The latest Consensus reading shows a whopping 76% of its respondents as being bullish – one of the very highest readings in 17 years.
Market timing this time of year is particularly tricky, as unknowables like flows into mutual funds can play havoc with what are otherwise traditionally reliable indicators. Still, when looking at the bulk of our measures tonight, in combination with the likely gap up tomorrow morning, the setup looks ripe for at least a mild selloff over the next week or so. I certainly would not be buying into tomorrow’s gap up. If the market is able to sustain the gap, I may have to re-evaluate, but the pieces are in place for a decline into mid-December.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: no positions
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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