Snapshot Notes - October 29, 2007

As of:

SPX 1511

One of the hallmarks of the behavior in the broader equity indices over the past year has been the tendency to see a "thrust, relax, dip" kind of pattern play out over about a week's time.

This is where we see one or two days of heavy upside buying pressure, followed by two or three days of going nowhere, then a small, one- or two-day dip that helps to relieve the short-term overbought condition. This has happened time and again since the 2006 summer low.

We can quantify this by looking for any time that the S&P 500 was short-term overbought, and then formed an NR7 day. An "NR7" is formed when today's intraday range (i.e. high minus low) is the smallest of any other range of the past seven trading sessions. "Overbought" can be defined any number of ways, and for these purposes I used our STEM.MR Model, which is currently above its upper trading band.

I've written about this pattern quite a bit over the years, and with increasing frequency since 2006. Market performance going forward has been pretty consistent, with the S&P showing a negative return a week later about 70% of the time. Because the dips tend to be mild, however, the overall average return was actually very slightly positive.

One of the things the market has going for it now is seasonality, and I've already written enough about that (suffice it to say that we usually see positive returns through the beginning of November). We also have the FOMC rate announcement Wednesday afternoon, and that's going to give us a good bit of volatility both ways.

Leading up to the meeting, it wouldn't be unusual to see more of what we're getting today. Moderate intraday moves, mostly with an upside bias, and relatively low volume as traders await the Fed reaction. This isn't an especially good time to be aggressive either way, particularly as we still have "gap risk" from overnight earnings announcements, so I'm playing it very close to the vest and not doing much until we get some of these unknowns out of the way.

As of:

SPX 1511

HELP ARCHIVE

Good Monday morning...we begin the new week with some mild follow-through to Friday's impressive session, with most of the major indices and broader sectors showing moderate gains from Friday's close.

We left last week with the market responding how it "should" have when the S&P 500 cash index bounced off of its breakout level of 1520. With a small smattering of signs suggesting that the prior week had scared enough folks to matter, and some upcoming seasonality that has been consistently positive, there was little to argue against still-higher prices.

Data released late Friday and over the weekend hasn't changed the picture too much. The latest release of the Commitments of Traders data showed that "smart money" commercial hedgers had become exceedingly net short the Nasdaq 100, which is a troubling sign. I showed a chart on Friday of how past extremes in the data have lined up well with turning points in the NDX, so that certainly sounds a note of caution.

The odd part is that at the same time, these traders are very net long the S&P 500, and honestly I'm still struggling with what to make of that. It could be as simple as a pairs trade (long the S&P 500, short the Nasdaq 100), but things are rarely simple and straightforward in this business.

Small options traders pulled back just a bit on their optimistic bettings in the latest week. A couple of weeks ago, they were positioned their most aggressively on the long side since late in the year 2000, and they got smacked the week before last because of it. But that hasn't deterred them much, and they continue to buy call options pretty aggressively when compared with the amount of protective put options they're buying.

So it's a fairly mixed picture here, especially in the intermediate-term. Shorter-term, I can't find a whole lot to quibble with, given the overall positive technical look of the major indices, the looming FOMC meeting and the tendency to rally during this time of year. Our shorter-term indicators are beginning to show a few overbought extremes, but nothing really notable as of yet. At least for now, then, I can't find a solid reason why longs shouldn't be given the benefit of the doubt, and that should continue until we either fall back under 1520 on the S&P or our more sensitive guides line up in solidly overbought territory.

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