Snapshot Notes - October 23, 2007

As of:

SPX 1511

During earnings season, we have to deal with large gap opens on a daily basis. It makes life treacherous for shorter-term traders, but it also present opportunities at times.

Last Wednesday, we went some data related to times when the broader market gapped up at the open based off large opening gaps in Intel. That proved to be a good guide to that day's trading, so we tried it again today with Apple as the tell.

Basically, looking back at broad-market reactions to large gaps in Apple stock told us to not expect a whole lot more upside in the S&P 500 today, other than what we were looking at after the gap up opening. Even going out a couple of days later, the evidence was fairly strong that trying to buy into the opening might not be the best idea.

That conflicts with something we went over yesterday, in terms of the likelihood of rebounding from the shellacking we got last week, and Monday's gap down open. While we never see a time when 100% of the data agrees, it's times like this when seemingly valid studies collide that makes trading even more of a challenge than usual.

Adding to the confusion are some longer-term conflicts. We have a market that has done little wrong technically since the August low, and with some Technology-related indices hitting new highs. That's the good news. The bad news is that because of that fine behavior, traders have seemingly gotten ahead of themselves, projecting even more gains onto the future. We've spent a decent amount of space in these notes going over some of that evidence during the past couple of weeks. Future performance after attitudes like that tend to be sub-par and very choppy.

With these kinds of cross-currents billowing us every which way, I'm standing aside again. At this point, the right or wrong earnings report could send us 20 points either way in the S&P, and I just don't see an edge in trying to determine which way that might most likely be.

As of:

SPX 1511

HELP ARCHIVE

There isn't much going on in the broader market today, as the major indices have mostly chopped around since the opening bell. The tech-dominated indexes are the standouts, being some of the only ones able to tack on gains after the opening gap.

A few of our short-term guides had a brief flirt with overbought conditions earlier this morning, but that has mostly been worked off. About the only thing that stands out to me among them is the Price Oscillator for the NDX, which is up to the top of its range. It's common to see prices back off after hitting readings like this, or at least give back any additional gains in the days following. I have no desire to try shorting it, though, especially as it trades at a new high.

Other than that, I can't find much to report one way or the other. On Friday afternoon and before the open on Monday, we discussed the case for a short-term bounce, lasting two-three days, and that has pretty much run its course. We may

well rally more, but the reasons for betting on the bounce have drifted away as prices have rallied.

On a short-term basis, I don't see much of anything that suggests either a long or a short is a high-probability proposition, so I'm going back to wait-and-see mode.

As of:

SPX 1514

HELP ARCHIVE

Good Tuesday morning...we begin the day with yet another gap opening (this is earnings season, remember?), and very positive reactions in the major indices based on the reports released since yesterday's close. Apple is currently indicated to open higher by about 7%.

Last Wednesday, we went over some stats related to times when the broader market gapped up at the open based off large opening gaps in Intel. That proved to be a pretty good guide to the day's trading, so let's go back to the well and try it again based off what Apple is doing.

Over the past 12 years, any time Apple has gapped up 5% or more during earnings season (regardless of whether it was a direct result of their own earnings release or not), the S&P 500 exchange-traded fund, SPY, has gapped up 75% of the time (22 out of 29 times), by an average of +0.4%. That's in line with today's indicated open.

Of the 29 gaps in SPY, buying the open and holding 'til the close resulted in 15 winning trades and an overall average return of 0.0%. That's not especially good or bad, but since the bear market low the S&P has done considerably worse, closing below the open 7 out of 11 times and with an average return of -0.4%. Out of those 11 instances, not once did the S&P close any more than +0.31% higher than the open.

During the day, the most that the S&P was able to gain from the opening print was +0.3% on average, while the average drawdown (i.e. maximum loss) during the day was -0.8%. That's not horrible, but it does call into question whether chasing this gap makes sense. Even by three trading days later, the S&P was positive only 3 out of the 11 times, and its average return was -0.5%. It would seem, based on history, that selling some into the gap would make more sense.

Yesterday morning, I went over some data regarding the gap down open, coming on the heels of such horrid performance the week before. In the past, when we got that kind of a setup during a generally up-trending market, then the go-forward performance in the broader market was abnormally positive. The only exception in the past 20 years was one occurrence just before the 1987 crash, which admittedly is a *big* exception.

So we have some conflicting data here. The stuff we went over Friday afternoon and yesterday morning suggests more upside ahead, at least in the short-term, while the gap stats are telling us that we shouldn't expect much today above and beyond what we're indicated to get at the open. My way to reconcile that is to sell some into the gap open (assuming a cash S&P 500 index price of 1514) and see how traders react to the pre-market change in prices. I'm going to keep some short-term long exposure here, and may add back later today if this gap is held relatively well.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.