Snapshot Notes - October 9, 2007

As of:

SPX 1523

Momentum markets can be defined by the inability to find "good" entries for anyone but the most aggressive breakout traders, and I think it's safe to say we're seeing a version of that here. Similar to the fourth quarter of last year, anyone not already on the long-side train is left running alongside, waving their ticket, hoping for enough of a pause to jump on board.

Some of the longer-term indicators that we watch are finally beginning to register excessive optimism readings after the nearly two month-long rally, another one of which triggered yesterday. Total volume on the NYSE yesterday was approximately 850 million shares, while on the Nasdaq exchange it was 1.5 billion. As you can see from the chart that we update daily on the site, that pushed the Nasdaq/NYSE Volume Ratio to one of its highest levels in years.

We follow this ratio as a sign of speculative fervor in the market. Since the NYSE is dominated by established companies and the Nasdaq is home to more up-and-comers, when we see the volume ratio between the two get out of whack, it can highlight times of excessive risk-taking (Nasdaq volume substantially higher than NYSE volume) or risk-aversion (Nasdaq volume at or below NYSE volume).

Spikes in this ratio above 1.5 have coincided with several of the more notable market peaks of the past few years, and moves above 1.75 have an even better record (yesterday's reading was over 1.80). The Nasdaq in particular has topped out within the next few weeks and struggled for months afterward when we've seen readings that high in the past.

Like the spike in assets to the Rydex Internet fund that I went over on Monday, this sign of renewed speculation in the tech sector has not been an indication of an imminent top, but those tops have tended to occur within a few weeks.

For the short-term, we're left with trying to pick up some scraps after the few days that have accounted for the vast bulk of the gains of the past few weeks. The modest pullback from yesterday was enough to move several of our more sensitive indicators into oversold territory, including the STEM.MR Model. As a strong market does, we jumped higher from those readings, and I'm not seeing much in the short-term that suggests anything other than even higher prices. A few of those guides are starting to tilt to the overbought side, but nothing major yet.

I am not a breakout trader by practice, which makes this type of momentum market the most difficult for trading positions. Instead of breaking the discipline, exceeding my risk parameters and chasing prices, though, I'm going to try to practice the patience necessary to get a good trade - and I'll be looking to trim longer-term positions if we continue to get more of those excessive optimism readings from our longer-term indicators.

As of:

SPX 1523

HELP ARCHIVE

The idea that all rate-related news is good for equities continues, as some minor volatility after the release of the FOMC minutes has morphed into yet another afternoon rally to new intraday highs. The DJIA and NDX are in clear waters above their prior highs while the S&P and Russell 2000 lag a bit behind their own.

I mentioned this morning that we got some curiously oversold readings in some of our more sensitive indicators with yesterday's very modest pullback, and I didn't see much that would come in the way of higher prices, and that continues to be the case. A few of those guides are starting to tilt to the overbought side, but nothing major yet.

Some of the longer-term indicators that we watch are beginning to register excessive optimism readings, but by their nature they rarely coincide with exact turning points. The more accurate ones typically precede a price high by anywhere from one to several weeks, which we saw again with this morning's note on the relative volume between the Nasdaq and NYSE exchanges, which has spiked to a years-long high.

So for the time being, barring a nasty reversal into the close, it still looks like fairly clear sailing in the major indices and I have no desire to fight that on any time frame. Getting in on the party is another matter, and I have admittedly been way too cautious on that front. I am not a breakout trader by practice, which makes this type of momentum market the most difficult for trading positions. Instead of breaking the discipline, exceeding my risk parameters and chasing prices, though, I'm going to try to practice the patience necessary to get a good trade - and I'll be looking to trim longer-term positions if we continue to get more of those excessive optimism readings from our longer-term indicators.

As of:

SPX 1523

HELP ARCHIVE

Good Tuesday morning...we begin the day with moderate gains in the major indices and mostly positive sector activity. Banks, Brokers, Retail and Semiconductors are curiously dragging, while some of the more-speculative sectors like Biotech and Internets are leading.

As the market continues to rise and hit new highs, we should expect more of the indicators we follow on the site to shift to worrisome levels. That's a natural function of equities doing well, and isn't particularly troublesome in an up-trending market until we get a large number of them suggesting the level of optimism is too great to be sustained. That's when the rally either stalls out or starts to lurch ahead instead of enjoying a nice, steady climb.

I've gone over a couple of those types of readings over the past week or so, and we might be able to add another one to the pile today. According to Reuters, the Wall Street Journal and the NYSE itself, total volume on the NYSE yesterday was approximately 850 million shares, while on the Nasdaq exchange it was 1.5 billion. As you can see from the chart we update daily on the site, that pushed the Nasdaq/NYSE Volume Ratio to one of its highest levels in years.

The volume data for the NYSE seems under-reported, but when all three of those organizations post a substantially similar number, I'm going to trust it. Something we need to consider is that many bond-related securities were unavailable for trading yesterday, which wouldn't impact the Nasdaq but may have had an outsized affect on the NYSE.

In an event, we follow this ratio as a sign of speculative fervor in the market. Since the NYSE is dominated by "stodgy", established companies while the Nasdaq is home to more up-and-comers, when we see the volume ratio between the two get out of whack, it can highlight times of excessive risk-taking (Nasdaq volume substantially higher than NYSE volume) or risk-aversion (Nasdaq volume at or below NYSE volume).

Spikes in this ratio above 1.5 have coincided with several of the more notable market peaks of the past few years, and moves above 1.75 have an even better record, though they are few in number - two in fact. Those other instances were December 31, 2003 and December 7, 2004. Those were holiday-influenced volume numbers, perhaps like yesterday, but they still occurred after quick spurts in equities, and both coincided with periods of future under-performance. The Nasdaq in particular topped out within the next few weeks and struggled for months afterward.

Like the spike in assets to the Rydex Internet fund that I went over yesterday, this sign of renewed speculation in the tech sector has not been an indication of an imminent top, but those tops have tended to occur within a few weeks. This is definitely something to monitor, and I will be looking to further reduce long-term long positions if we continue to ramp higher in the days and week(s) ahead, and on an increasing pace if we see more of these types of "excessive speculation" readings.

On a shorter-term basis, I have been flat - and frustrated - for trading purposes for most of the past few weeks. I have had zero desire to try the short side, and have been overly selective of long entries. There have been a few decent-looking opportunities to get in on the long side, but two of them occurred right before major unknowns that were sure to move the market one way or the other, and my opinion at the time was that taking positions ahead of them was more akin to gambling than trading.

So now we're left with trying to pick up some scraps after the few days that have accounted for the vast bulk of the gains of the past few weeks. Surprisingly, the very minor pullback from yesterday was enough to move several of our more sensitive indicators into oversold territory, including (just barely) the STEM.MR Model. As a strong market does, we've already jumped a bit from those readings, and I'm not seeing much in the short-term that suggests anything other than higher prices, especially if we hold above yesterday's lows in the S&P. Be on the lookout for declining volume heading into the 2pm release of the FOMC meeting minutes, and a likely increase in volatility afterwards. All rate-related news has been taken as good news lately, but we'll see if that can continue today.

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