Snapshot Notes - November 16, 2007

As of:

SPX 1490

Good Friday morning...we begin the day with a gap up open. Despite weak foreign markets, domestic futures are pointing higher, trying to build on the volatile rebound into yesterday's close.

I mentioned yesterday that I'm traveling today and through next week, so I wasn't anticipating doing a note this morning, but I couldn't let a few things pass without comment.

Despite a relatively mild correction from the recent highs, we have begun to see an avalanche of readings that are tickling the depths of pessimism. At this pace, it's hard to fathom what many of our sentiment guides would look like with a 20% drop from the highs.

The latest data from the folks at lowrisk.com showed that only 18% of the respondents to their poll said that they have bullish leanings. That's the lowest amount since June and is in the bottom 4% of readings over the 10-year history of the survey. The three-month return after prior readings when the Bull Ratio of the survey was this low averaged +5.5% with 12 out of 14 instances showing a positive return.

I mentioned Rydex traders yesterday, and how they were fleeing the sector funds at that fund company. This cannot be explained by the secular trend of assets leaving Rydex for ETFs or other fund families - just a month ago, more than 85% of their funds had assets greater than their average of the past 50 days. Yesterday, I wrote that only 9% of their funds currently had assets greater than their 50-day average, but after the new numbers came out that reflected yesterday's decline, that percentage has dropped all the way down to 3% (only 1 fund out of 33 that I track).

Unbelievably, that's the lowest number since March 12, 2003 as the bear market was suffering its last tortured hiccup. The only other times it has dropped this low since 2000 were a few days in mid-March 2001, a few times from June through July 2002 and early February 2003. Those in June 2002 were terribly early in terms of calling a low, but otherwise the others were good indications that the selling pressure had become too much.

That pressure is evident from the latest mutual fund flow statistics from AMG Data. While AMG notes that "significant capital gains distribution cash payouts contributed to the anomalously large number", the net outflow from equity mutual funds in the past week was -$9.6 billion, the most since mid-July 2002.

With mutual fund cash levels at such low levels, fund managers have little choice but to sell when they're hit with a sudden flood of redemption notices. The only thing making me hesitate to suggest that this is a tremendously bullish contrary sign is AMG's disclaimer about cap gains distributions. I don't know how much that impacted the numbers.

If everyone is selling, then who's buying? Well, corporate insiders for one. InsiderScore.com (an extremely useful service for institutional customers) revealed their latest Buy/Sell Ratio for this week, and it jumped to its second-highest level in the past few years. The only weeks that eclipsed this week were the two in mid-August as insiders bought aggressively into the initial subprime meltdown fears.

If you check out the Indicators at Extremes section on the Daily Overview page, you'll see a long list under "Bullish" and just a few stragglers under "Bearish". I'm not too concerned about those bearish ones, except for the Nasdaq/NYSE Volume Ratio which continues to show excessive volume flowing into so-called speculative shares listed on the Nasdaq.

The short interest data for the Nasdaq, also listed in the Bearish column, is extreme when compared to the past year, but not even remotely so when compared to the past decade.

The Mutual Fund Cash Position is also bearish, but it has been so for two years. It is questionable as an indictor for several reasons as I've discussed over the years, so as far as I'm concerned it's little more than an old dingleberry that's probably never going to drop off the list.

When we combine this new data with all the others we've gone over during the past week, it seems reasonable to suggest that we're in the final spasms of hammering out an intermediate-term low, especially considering that we have the most consistently positive time of the year coming up soon. "Everyone" already knows this and it's being talked about a lot, so perhaps that makes it less likely, but...well, you know my thoughts about trying to outguess the indicators.

The technical condition of some of the major indices is a concern (namely the series of lower highs and lower lows in the S&P 500, and the flat or declining longer-term moving averages), and quite frankly I'm a bit put off by just how extreme some of these indicators are when we've corrected so little. But until we see a failure of such oversold extremes to trigger a meaningful rally - and we haven't really seen one of those since June 2002 - I'm going to keep assuming the best.

The short-term could still be dicey before the consistently positive Thanksgiving period kicks in. I mentioned a stat yesterday related to option expirations that had very negative connotations for today, and here's another (less dramatic) one: any time the S&P has gapped up 0.25% or more on an expiration Friday, buying that open and holding 'til Monday's close resulted in 60% losing trades (25 out of 42), and an overall average return of -0.2%.

I said yesterday afternoon that the bounce off support (the re-test of Monday's low) near the close, and the short-term oversold conditions as shown by our short-term indicators could be enough to turn this thing around. I wasn't betting that way yet, due to the precarious technical condition we're in, and those expiration-related stats. Given the gap up opening, that could have been a mistake, and if the opening prices hold for more than an hour that possibility would increase.

At these times, it's always a fierce battle between being patient and securing what appears to be an entry with good risk/reward characteristics, versus being too cute by trying to find the perfect one. There's no right answer, it's all a matter of personal risk tolerance, depth of capital, time frame, etc. Because I won't be able to do site updates during the day, I may not be changing our position icons (the intraday charts will still be updated, though).

My bottom line thought is that we're at or within a few days of a trade-able low. The risk/reward for longs appears good, with the caveat that a move under what should be support around 1430 on the cash S&P 500 index should trigger sell stop orders and potentially a quick drop. Seeing that kind of washout and a reversal would be the best indication that the selling pressure is exhausted. So I'd stick with long-side trades, but if we cannot hold this open and we get weakness today and/or Monday, watch for a potential quick move at or under that 1430ish area to set up a better short- and intermediate-term entry.

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