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TUESDAY, SEPTEMBER 18, 2007

Volume Skew One of the Greatest in 50 Years

09/18/07 5:00 PM EST

There are going to be a whole host of extremes that trigger on a day like today, and it's going to take some time to sort through what they may mean.

One example is the absolutely huge skew of volume in stocks traded on the NYSE today.  According to my preliminary data, there was 25 times more volume flowing into stocks up on the day than down, and it's clear that there was a huge scramble to get as long as possible.

The last time we had a 25-to-1 up volume day was August 20, 1982, as equities were making their low before the huge bull market of the past 25 years.  Since 1950, there have been a total of 7 days with such a skewed ratio.

The interesting thing is that in most cases (5 of the 7) stocks fell back in the very short-term, with a negative return the following day.  But within five days, 6 of the 7 were positive, and that kind of return continued to build.

By three months later, all 7 were positive and the average return was +9.4%.  The remarkable thing is that during those three months, on average the most that the S&P 500 dropped was -1.8% while the average maximum gain was +12.5%.  That is one of the most lopsided risk/reward ratios over that time frame that we have seen in any study.  For those curious, here are the dates:  12/27/50, 1/11/51, 10/23/57, 11/15/57, 11/1/78, 8/17/82 and 8/20/82.

There will probably be more of these types of extremes to go over, but for the most part they're probably redundant they're probably redundant.  We've gone over this type of thing many, many times over the years and it's clear what the pattern is after skews like this - relatively weak returns in the very short-term as traders catch their breath, but solidly positive returns longer-term.

Coming into today, we had some mild oversold readings from our short-term guides, most notably the STEM.MR Model.  Together with some stats regarding gap up opens on an FOMC decision day that we went over this morning, the setup looked good from the long side.  I guess I was too chicken, though, and stayed pat - holding a trading position ahead of the Fed's decision seemed more gambling than trading.

Those short-term indicators have started to lean into "excessive optimism" territory now, but given the still-positive intermediate-term conditions, I don't have any desire to try to step in front of this market and try shorting.  I'm more inclined to look for places to add short-term long positions, and that should come with a relaxing of prices back towards 1500ish in the S&P.  If we get that in the coming days, it should set up an opportunity for those who sat out today's fireworks.

Have a good evening and we'll see you here tomorrow.

Fed Decision Met With Resounding Approval

09/18/07 3:20 PM EST

The Fed decision has been met with enthusiasm, as the major indices are up big and every sector I follow is in the green by at least 1%.

The last time we had such a joyous reaction to a Fed decision was June 29, 2006 when the S&P 500 rose about the same percentage it's up right now.  It was also trying to emerge from some intermediate-term oversold conditions at that point, but that day's reaction didn't last long - stocks gave up those gains and more during the next couple of weeks.

Generally, huge gains or losses in reaction to economic events are better contrary indicators than anything, at least in the short-term.  As an example, over the past decade there have been five other times when the S&P rose more than 2% the day of a FOMC decision, and a week later it showed a positive return only two times.

The push higher has moved our short-term guides out of the mild oversold condition they reached yesterday, and we're now getting some preliminary overbought readings.  I would be careful about being too eager to try to step in front of this move, though, as the S&P has now "confirmed" the August low by breaking out above that 1480-1500 area.  I don't put a long of weight on technical patterns like that, but others do, and in the short-term that could be enough to help carry us higher, or at least limit the potential negative backlash.

I mentioned that I was going into the decision flat for trading positions, and intended to let things shake out.  That has not changed, and what I'll be watching for from here is some relaxation of the gains over the next few days - the ideal setup would be maybe some more follow-through tomorrow, then a couple of days of sliding back towards 1500.  That should set up a high-probability long position for short-term traders.  With the still-positive intermediate-term conditions we're in, I'm not interested in trying to short this move.

Gap on FOMC Day a Rare Sight

09/18/07 10:25 AM EST

Good Tuesday morning...we begin the day with a pop higher in the major indices and most of the broader sectors based on not-as-bad-as-everyone-thought earnings from Lehman, and some bad economic numbers.  At the moment, "bad" is "good" for those looking for a little relief from the Fed.

It's relatively rare to see such a large gap up open the day of an FOMC meeting.  I show eight occurrences out of 73 opportunities during the past decade.  Somewhat surprisingly, the gaps ended up being a pretty positive indication - the S&P closed higher than the open 7 of the 8 times by an average of +0.5%.  The days were quite volatile, however, with an average drawdown during the day of -0.9% and an average additional gain of +1.1%.

Combined with a weak oversold condition from the STEM.MR Model, this would normally be a pretty good-looking short-term long setup.  But this is not a normal time, as the FOMC decision that we're all sick of hearing and reading about will be announced at 2:15pm EST.  I noted yesterday that the general pattern surrounding these announcements was a drift higher leading up to the announcement, then two or three volatile whipsaws afterwards that erase any prior gains or losses, then a more trending move into the close.

I obviously have no idea what the Fed will or won't do this afternoon, so I see no need to gamble on the potential outcome.  I will be totally flat for trading positions ahead of the release, and will be waiting perhaps for a day or more to see how it all sorts out.  There is little edge in gaming the initial reaction, though sometimes if we get an extreme move afterwards there may be an opportunity for a "fade", or trade against, the direction that the indices close today.  I'm going to have to take it as it comes and be reactionary instead of anticipatory.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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