Snapshot Notes - November 21, 2007

As of:

SPX 1490

This morning I touched on a few things that I was watching in order to become more aggressive with the idea that initiating or adding to long positions made sense.

I was looking for a reversal of the large gap down that put us into positive territory, or an explosion in the number of new 52-week lows on the NYSE to 800 or more, or a move in the S&P 500 cash index down to 1400 - 1410.

It was touch-and-go during various parts of the day for all three of those conditions, but by the close none of them were actually met. As hard as this kind of constant intraday disappointment is to see, it's getting us that much closer to what appears to be a high-probability opportunity.

I'm basing that on everything we've gone over during the past one to two weeks, along with some new developments. As of today, the spread between our Smart Money Confidence and Dumb Money Confidence has moved to +42%, a legitimately extreme reading. This is not something that occurs often, and it usually pays to take notice.

Over the past decade, there have been 68 days that showed a spread this large. One month after those days, the S&P 500 was positive 63 times (93%) by an average of +5.7%.

While we had fewer component indicators prior to 1997, we actually have the Smart Money / Dumb Money indicators back to 1986. Looking at this wide of a spread since then, the one-month return was positive 72% of the time and the average return was +2.5%. The three-month return averaged +6.7% with 93% of the days showing gains.

One of the reasons for the wide spread is our Stock/Bond Ratio, which moved to -2.7 with today's trading. For all practical purposes, the minimum in this indicator is -3, so we're very near that point. We get this kind of extreme only once every couple of years, so once again it's an event that makes me stand up and take notice.

The ratio reached this extreme of a level only twice since the bull market began in the fall of 2002, those being 08/06/04 and 04/15/05. Both were excellent times to be thinking about the long side, and they weren't alone - over the past decade, there have been 35 days showing this kind of extreme, and a month later the S&P was positive 91% of the time by an average of +4.8%. Since 1965, there have been 125 days, and the one-month return averaged +2.5% with 77% of them being positive.

This November has been wicked, the worst since 2000. Over the history of the S&P 500, the current month is showing one of the very worst intra-month November drawdowns - the fifth-worst, in fact. I checked for any other time that November showed an intra-month drawdown of at least -5%, and then how December tended to fare.

Out of the 10 occurrences, December showed a positive return 8 times (one was barely a miss, with a -0.2% return). The overall average return for those ten Decembers was +3.1%, nearly double any old random December. The average intra-month drawdown was -3.1% (worse than random Decembers), but the average intra-month gain of +4.7% was quite a bit above random Decembers. Based on this type of analysis, it seems as though while December may have a chance at being more volatile than normal, we should have a better-than-average chance at seeing bigger gains.

From an entry point of view, it would be nice to see that final big whoosh day that gives us the true panic readings that we've seen a number of times at important market lows - things like that 800+ number in the NYSE new low figure I mentioned earlier. The longer we get this dragged-out drip, the more it wears on early buyers and the more likely it will ultimately result in one of those "puke" sessions. Better to get it out of the way sooner rather than later.

It would be highly unusual to see something like that on a day like Friday, which is shortened by the holiday, but maybe we'll see it on Monday with weak black Friday reports or some other excuse. Whatever happens, we currently have a multitude of reliable metrics screaming for some kind of relief, and which consistently precede very favorable intermediate-term conditions. I'm concerned about the technical condition of the broad indices like the S&P 500, which appear very tenuous, but other than that it seems as though this short-term weakness should be more than made up when taking an intermediate-term view of one to three months.

As of:

SPX 1490

HELP ARCHIVE

Good morning...I am currently away from the office and have been posting brief updates to the site each evening, but this morning's pre-market action is unusual enough to garner a note. Based on no specific catalyst that I can find, the futures on the major indices are down just over 1% as I write, and at this point appear to open right at yesterday's intraday low.

It has been a rare feat to see the pre-market futures down as much as they are today on the day before a holiday. With so many traders already on vacation, we just don't often see big moves, period, much less large gaps down during the pre-market session.

I can find only one time since 1995 that the S&P 500 proxy, SPY, opened down by more than 1% on the day before a holiday, which was February 16, 2001. It went on to lose quite a bit more during the day, but recovered enough to close "only" an additional 0.5% lower than the open.

A sample size of one is pretty much meaningless, so I looked for any large gap down, with "large" being defined as 0.5% or more. We still only get 4 instances, and the S&P ended up closing lower than the open all four times, by an average of -0.9%. For those curious, the dates were 02/12/99, 11/22/00, 02/16/01 and 07/03/03.

I also checked for any time the S&P 500 cash index lost more than 1% the day before any exchange holiday (using closing prices). Granted, there's a lot of trading between now and the close, but we have to work with what we have.

Using that test, there were 17 previous occurrences, and it didn't bode well for the very short-term - the following day, the S&P dropped again in 11 of those instances, and the average return was -0.8%. The losers averaged -1.7% while the winners averaged less than half that, at +0.8%. There was only one occurrence on the day before the Thanksgiving break, in the year 2000, and that was actually the 2nd-largest gainer among them, as the S&P jumped about 3% over the following two days after the holiday.

Last night, I mentioned several of the positives that we have working for us now, and if this setup can't interest the buyers more than the sellers, then we may have a real problem on our hands. The market is weak, there is no doubt about that, and we continue to see an increase in the number of stocks hitting new lows. It reached over 600 on the NYSE yesterday, nearly 20% of all issues traded.

That number is exceedingly bad, but *not quite* to the point where it suggests that we're seeing a wholesale liquidation of anything that has been under-performing (aka capitulation). If we saw the number of lows hit 800 or so - which it may do today if the opening weakness sticks around into the close - then we may have more grist to work with in terms of the argument that buyers have tossed in the towel.

What we're seeing today is very unusual, and not what I expected to see given the setup we've been going over. There is a chance that we'll see a nice intraday reversal, but I'm not counting on it. Retailers have been so weak that it's possible buyers won't return unless we see an upside surprise in the "black Friday" retail sales figures, and some kind of stabilization in the credit prices of the financials.

I mentioned last night that we more often than not see weakness immediately after a reversal like yesterday, but then strength over the next week or so. Combined with everything else we've been going over, I still think there's an enticing entry for long trades somewhere in here, and it should come with an extreme move today...either a dramatic intraday recovery that moves us into positive territory on the day, or a complete washout that gives us that jump in new lows to 800+ of NYSE issues (you can check that on Yahoo! or WSJ.com).

That would probably take us to around 1400 - 1410 on the S&P 500, a spot where I would be interested in going to a fully invested position for both trading and investment accounts.

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