Snapshot Notes - November 26, 2007

As of:

SPX 1490

We came into the new week with some early-morning optimism after Friday's upside reversal and encouraging preliminary retail sales data. Several hours before the U.S. markets opened, S&P 500 futures were up nearly 15 points.

Those off-hours futures are often a wolf in sheep's clothing, and today proved no different - they peaked well before the regular session opened, and we just kept sliding from there. The end result was a loss of more than 50 points from those early-morning hours.

That has taken us down towards the area I was looking at last week, between 1400 - 1410 on the cash S&P index. There's nothing magical about this area, it just coincides with the uptrend line from the past four years, and the closing low from mid-August. A similar argument could be made for potential technical support near 1380, which would approximate the intraday lows from both March and August.

Whatever level we may stop at, we need to see some stabilization in price, and that isn't happening. I mentioned this morning that it would be highly unusual to see a pre-holiday session mark an intermediate-term low, a point that was quickly reinforced. But given the readings from many of our longer-term guides, we should be very close to the kind of session that will mark a low heading into the end of the year.

To be more confident in the idea that that point has been reached, I wanted to see either a total puke session, where new lows on the NYSE reach 800 or more, or an upside reversal that sticks. We saw the former in August, and the latter at many previous lows during the past few years. A good tip-off that we're seeing the latter is when we get overbought short-term readings, yet prices keep rising right through them, or gently consolidate. Our short-term indicators reached overbought late Friday, and we rolled right over to new lows - that's not the kind of thing we need to see.

There were a number of developments today that seemed like they could be potentially important, but I've been having a tough time finding anything in the short-term that seems to provide a solid edge. I'm going to continue to hold back until I find something I find worthy to hang onto, which may not come unless and until we get either of the scenarios mentioned above.

As of:

SPX 1490

HELP ARCHIVE

I mentioned this morning that I didn't have too much of a feel for the short-term after being out of the office for the past several days, so I've spent the day going over dozens of various studies trying to find some kind of an edge.

It's not like there is nothing notable about today's trading - we have a host of events to worth with, such as the severity of the price reversal, post-holiday trading, and the big move in long-term bond yields. But everything I've looking into has led to a dead-end, at least as far as short-term future performance goes.

By Friday's close, our short-term guides had become overbought, and like a bad market does, we've done nothing but hit the skids since then. At past intermediate-term lows with longer-term oversold readings similar to what we have now, when the STEM.MR Models became overbought, prices gently consolidated or continued to rise. The fact that we're not seeing that today increases the chance that Wednesday is not going to become the 2nd time in the S&P's history that a pre-holiday day marked a trade-able low.

This is discouraging behavior, since we came into the new week with some actual price evidence that the pessimism had reached enough of a crescendo that it was attracting stronger buying interest. Despite the usual caveats of relying on thin holiday trading, there was at least something to build on there.

So we continue to be standing on that slippery slope of a technically damaged market that is severely oversold. That makes it tough to short and tough to buy, at least with conviction. I'm still doing very little trading-wise, until we either get a washout session with a huge spike in new lows (something on the order of 800+ on the NYSE), or additional evidence that prices are beginning to stabilize. We're far from either at the moment.

As of:

SPX 1490

HELP ARCHIVE

Good Monday morning...We begin the new week with traders returning from a long weekend, pre-market futures fading markedly from a significant early-morning rise, and an air of potential bottoming action after Friday's jump.

Last week, I left off on Wednesday with a note about a few of the extremes that triggered. One of the notable ones was the Stock/Bond Ratio, which had stretched close to its maximum oversold level. As I detailed then, returns following similar extremes have historically been extremely consistent, and skewed largely to the positive side for equities.

The severe selling pressure during the week also caused the spread between the Smart Money Confidence and Dumb Money Confidence to balloon to +42%. Similar readings in the past have also been good intermediate-term signs that the vast bulk of the price decline was behind us and any further short-term weakness would prove to be temporary.

Shorter-term, I was looking for a move to 1400 - 1410 to become fully invested, and we didn't quite make it there on Wednesday, hitting 1415 at the lowest point. Friday's rebound was impressive, more than erasing all of Wednesday's losses, but besides the concern about Friday being a light-volume affair where determined traders could bulldoze orders while others were out of the office, it would be unusual for Wednesday to mark a trade-able low.

What makes me say that is it is highly unusual for the day before a holiday to mark significant lows. Out of 462 holidays since 1950, there has only been one of them (08/29/97) that marked a 30-day low in the S&P 500 (meaning that that day's close was the lowest price for 30 days before and 30 days after that date). There have been a total of 159 of those lows in the S&P 500, and again only one of them happened to fall on a day preceding an exchange holiday.

But Friday's kind of reversal was the type thing I was looking for to have more confidence in the idea that the spate of breadth-, price- and sentiment-based extremes we've seen in the past couple of weeks were beginning to matter, so perhaps Wednesday could mark only the second time in the S&P's history that an intermediate-term low began the day before a holiday.

There have been 25 times over that span that the S&P rallied more than 1.5% the day after a holiday. The following day, the S&P was positive 48% of the time, but two days later it was up 64% of the time. Going out further, the returns were positive but didn't deviate significantly from random.

It managed to stage that kind of performance only one other time the day after Thanksgiving, which was in 1971. That year the S&P had also suffered a wicked November, but that was the end of it - the index rallied a mighty 11% from that point through December.

I've been mostly out of the office during the trading day for the past several days, so it's going to take me a bit of time to get back in the swing of things for the short-term. I don't have any particularly compelling setups for the short-term, so I'm just going to sit back and see how Friday's reversal gets treated. The bulls now have some actual price evidence to build upon the potential created by the sentiment extremes we've noted, so I want to see them take advantage of that and not give back too much of Friday's progress. Some testing of Wednesday's low would be normal, we just do not want to see a lower low.

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