Snapshot Notes - October 1, 2007

As of:

SPX 1523

By mid-week last week, there were some signs that technology stocks had become stretched to a point that a rest was more likely than a continued ramp higher, and least for a bit, and without a new sector playing catch-up, the prospects for good gains in the broader market seemed dim. We ended up getting a rotation of sectors that tried to take the lead, and it didn't take us much of anywhere in terms of the broader indices.

Then comes the new month. I mentioned last week that when September has bucked its nasty habit of negativity, then the beginning of October has jumped higher 10 out of 11 years. I didn't put a ton of weight on a stat like that, but it did make me a little more trustful of a potential breakout over 1540 in the S&P 500 should that occur.

We didn't have to wait long, as we got the breakout this morning. After it held for more than 1/2 hour, traders began to pile in and we saw a steady trend day most of the afternoon. Now we're in a potential battle zone between what might be support now at 1540, and probable resistance around the old high of 1555.

I've run quite a few tests today regarding breakouts in the DJIA and NDX, divergences we're seeing now in some of the breadth figures, performance during October, and a host of other metrics. Nothing has turned up much of interest, which makes it tough to have much of an idea as who is more likely to be the short-term winner - those betting on a failure and a double-top in the S&P, or those hopping on and waiting for a break over 1555.

Without an edge either way, I'm reverting to reactionary mode here and will wait for a better setup. Those have been few and far between since the rate cut, but I don't believe in chasing prices out of blind faith and now is no time to abandon that discipline.

As of:

SPX 1523

HELP ARCHIVE

The romp continues for the bulls as not only did we get the breakout over 1540, but it morphed into a trend day to boot for most of the session.

A "trend day" can be identified by buying pressure coming in every time the NYSE TICK meanders towards the zero level, taking us to fresh intraday highs soon afterward. When the TICK cycles into overbought territory over +1000, then the S&P usually backs off no more than 2 or 3 points. When those conditions exist past the mid-morning hours, then we very often close at or near the day's high. Things are getting a little loose as we head into the last half-hour, however, so I wouldn't take a close at the high as a given.

In response to a subscriber's inquiry, since the bull market began in the fall of 2002, this is only the third time we've seen such a strong move to start a new month with the Nasdaq 100 hitting a new high and the S&P 500 not. Those others were December 2005 and July 2007. The S&P ended up struggling the rest of the month, closing lower both times, but going back in history the record was more positive (the S&P showed a positive return for the month 27 out of 41 times by an average of +1.4%) and I'm unconvinced there's anything to it.

Even with today's move, most of our shorter-term guides aren't yet suggesting overbought conditions, except the Price Oscillators which are based purely on, well, price. A steady trend day will push them into overbought, so today's readings are no surprise.

We're now in what should prove to be a short-term battle zone, between the breakout above 1540 and the old high of 1555, and between those who are shorting in anticipation of a double-top and those buying betting on a break to new highs along with the NDX and DJIA. I'm purely in reaction mode here without a solid feel as to which is more likely. I remain flat for trades that have an expected time frame of several days - not a great feeling as long as we keep running, but I believe in risk control above all else, and I have just not found a trade that meets my criteria over the past several days.

As of:

SPX 1523

HELP ARCHIVE

Good Monday morning...we begin the new week, month and quarter with a quick move higher in the major indices and mostly positive reactions in the broader sectors. In the most interesting turn of events, banking shares are mostly higher despite some dire warnings from several premier financial institutions.

The theme from last week was sector rotation - we saw a constant rotation as leaders became laggards and vice-versa. That kind of churn makes for very difficult trading in broader indices like the S&P 500, and indeed that index didn't go much of anywhere as its underlying components were in a state of flux.

The better moves in an index like that, up or down, come when most of the major sectors are in agreement, and we haven't had that since the FOMC cut its target rate. With the third quarter out of the way, perhaps that will now change, and we'll get a better trend out of the broader indices.

I put a fairly heavy emphasis on seasonality last week, but the more consistent biases in that respect are pretty much out of the way now. One thing that might be a factor is that in the history of the S&P 500, when September bucks its negative trend and closes strongly, then October has started very well by showing a positive return 10 out of 11 times during the first week of trading. After that, performance has tailed off closer to random.

One concern we've had to deal with is the badly lagging returns put in by financials, and disclosures like we've seen the past few days from UBS and Citigroup are certainly a big reason why traders have held off risking capital in the group. But the reaction in their shares today might be telling us that the worst news is already baked into their share prices. If so, and that group can get going to the upside, then there should be no question that we'll be seeing new highs in the S&P.

I mentioned last week that I am very uncomfortable as a breakout trader, as the risk often seems greater than the potential reward, and we are so often subject to false moves. But the 1540 area on the S&P 500 cash index is a pretty clear line in the sand, and a breakout above there that holds for more than 1/2 hour should suck in enough traders to let us at least challenge the previous high of 1555. Trying to buy for that kind of move always seems like we're dancing between the feet of elephants, squashing us on the slightest turn in direction, but it's about the only viable short-term trade I see at this point. I'm still undecided if I'll try buying if we see that breakout today, but if so it will probably be for such a short-term ride, and with a questionable risk/reward ratio, that I'll probably not even change our position here on the site.

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