Snapshot Notes - October 5, 2007

As of:

SPX 1523

This morning, I went over the figures related to gap up opens on the heels of a jobs report release. Those suggested that buying the open and chasing prices higher was probably not a good idea, and unless the S&P 500 and Nasdaq 100 added more than 0.5% from their opening prices, we'd likely close lower than the open.

So much for the reversal idea, as both indices tacked on that amount, and have kept right on trucking. Now the S&P is on track to not only add more than 1% in value today, but also close at a new all-time high. Not that we can read anything into one occurrence, but the only other time in recent history I can find where the index accomplished a similar feat (on the day of a jobs report) was March 4, 2005. For what it's worth, that marked the exact closing high before the index went into a 4% funk over the next month.

I'm still kicking myself for not taking that long in the Nasdaq 100 from yesterday, which obviously looks pretty foolish given today's outcome. No excuses on my part for that one - I thought it was prudent to wait and see the reaction to the jobs report and in hindsight it turns out that caution was ill-advised.

The difficult part about the past few weeks is that the entire 80-point gain in the S&P 500 has come from only three days - September 18th (the day of the FOMC rate cut), October 1st and today. The first and last were extremely difficult to position for since they hinged upon complete unknowns, and entering short-term positions ahead of them seemed little more than gambling.

We can whine and second-guess all day long, but I'd rather look ahead and figure out the next opportunity. I still have no desire to try shorting this thing - there is little evidence suggesting that would have a high expectation for success. I'm still most interested in long-side setups, but those have ruefully passed me by as we got the big upside and now our short-term stuff is back tapping on "excessive optimism" levels. So I remain flat, frustrated, and waiting for prices to settle back and give a better entry than what we've seen.

As of:

SPX 1523

HELP ARCHIVE

Good Friday morning...we begin the day with more of the "all news is good news" theme as the major indices are gapping up strongly in the aftermath of this morning's jobs report.

It was a pretty good bet, given yesterday's tight range, that we'd see an expansion in that range today and most likely it would come in the form of a gap open. That's why I wanted to come into today flat for trading positions, since the gap could have just as easily been to the downside as upside. That seems silly now in hindsight, but that's the way it goes.

Since I held off on a long in the Nasdaq 100 yesterday, a large gap up open is about the last thing I wanted to see. So does it make sense to jump on board now? Probably not.

Since the bear market low in October 2002, there have been 10 times when the Nasdaq 100 gapped up more than 0.75% on the morning of a jobs report. Buying that open and holding 'til the close resulted in only 3 winning trades, and an overall average return of -0.6%.

On average, the NDX was able to gain an additional +0.5% from the open sometime during the trading day, but it also lost -1.5% as well, more than twice as much as it gained. If it gained more than +0.5% from the open, then the chances were significantly greater that it would close higher than the open. For today, assuming current pre-market prices hold into the open, it would mean that if the NDX trades above 2130ish, then I'll be dampening my expectations for a meaningful intraday downside reversal.

For the S&P 500, things look pretty much the same. There have been 11 times that the Spyders (SPY) have gapped up +0.5% or more on a jobs report. It closed higher than the open 3 times with an overall average return of -0.5%. On average, SPY gained an additional +0.4% during the day, but lost -1.1%, nearly three times as large. The returns and % positive were just as poor when looking out up to three trading days later - that's what I meant yesterday about a large gap up being about the worst-case scenario for today.

As much as I regret missing the potential of that long in the NDX from the past couple of days, I would almost certainly have been out of most or all of the trade on this morning's gap. The tendency to reverse over the course of the day, or next few days, from large gaps following these kinds of economic releases are just too strong to ignore - we only need to look back to last month's reaction for confirmation.

If we gap up right near this week's high - which it looks like we're going to do - very aggressive traders may be looking to sell short with a stop above the recent highs (around 1550 in the S&P and 2120 in the NDX). That could be a pretty "crowded" trade, though, so if we do hold and trade above those highs, then I'd be looking for even more of a spike higher as those short-sellers cover and others panic to get long on the breakout. If the S&P and NDX gain more than 0.5% from their opens, from the stats above it seems like the probability of a downside reversal would diminish significantly and I would not be pressing any short-side bets at that point.

I wanted to get this note out before the open, so if the pre-market softens ahead of the open, some of the stats above wouldn't apply. Even so, any kind of gap up on the heels of the jobs report tends to precede poorer-than-average returns going forward, just not to the degree that the ones above did. So bottom line, I will not be chasing this gap up and will have to watch (painfully) from the sidelines if we keep ripping higher.

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