Snapshot Notes - November 29, 2007

As of:

SPX 1490

A few months ago, it would have seemed impossible that a 14-point intraday range could be considered "small", but today's chop has carved out the tightest intraday range of the past 21 trading days. That's not especially surprising given what we went over yesterday afternoon and this morning.

Quite a few of the overbought extremes have worn off our shortest-term guides, without much price pressure in the major equity indices, and that has to be considered another positive for our intermediate-term expectations. The past few times the STEM.MR Models hit overbought territory, equities sunk almost immediately thereafter, so this is a welcome change in character.

The types of shorter-term studies I looked at heading into today were sending conflicting signals for the short-term, so I'm not inclined to press for trading accounts. The best bet at this point seems to be that even if we do get another upside push in the next day or so, it should be beat back in the days after that - we just don't often get reversals like the past few days without some sort of testing of the low within the next couple of weeks.

I mentioned yesterday that I looked at times when the S&P 500 hit a six-month low, then exploded higher over the next couple of days. I took another look from a different angle today, and found 16 occurrences since 1950. Of those, the S&P came back to test or modestly exceed the low 10 times. On 3 occasions, the signal just failed miserably to indicate that a low was at hand, and the 3 others didn't see any further testing whatsoever - stocks just continue to roar higher.

So the odds from that seem pretty good that we have seen a low, particularly when we couple it with all the studies we'd gone over previously regarding the historically stretched breadth and sentiment conditions. The probability also seems high that we should see some sort of re-test of Monday's low, which I would take to be an approach towards 1440 - 1450 on the cash S&P 500 index as close enough to count. If we continue to power higher over the next day or two without more of a rest first, then I would looking to sell against a rally towards 1480-1500.

As of:

SPX 1490

HELP ARCHIVE

Good Thursday morning...We begin the day with some minor downside pressure after yesterday's trend day. We often see some shaking-out of late buyers after such big up days, so I'm not reading a whole lot into the weak open just yet.

One of the more remarkable things about yesterday's explosive upside was just how "explosive" it was. Of the volume flowing into stocks on the NYSE, 95% of it could be accounted for by stocks that rose on the day, the fourth-highest amount in the past 17 years.

That marks the second time in less than a week that up volume has accounted for more than 90% of all NYSE volume, a truly rare feat. The last time we saw such a concentrated display of buying fervor was at the end of August of this year, but prior to that we'd have to travel back more than 20 years.

Historically, two instances of 90% up volume days within a five-day period has been a good sign of further strength to come. The last 19 signals, dating back sixty years, all showed positive one-month forward returns, averaging +3.5%. Prior to that, the returns weren't quite as consistent, but then was it was quite a bit easier to see such extreme readings the further back we go. There were 38 of these buying orgies in the 1940's alone, but only 14 since then.

Of those 14, the performance in the DJIA going forward was very impressive (when buying after the second 90% up volume day). Looking at returns from one day to one year forward, at no periodic interval was the Dow positive on less than 11 of the 14 occasions.

One month later, the Dow was up 12 of 14 times by an average of +3.7%, but perhaps most impressively the average maximum loss during that month was only a measly -0.6% compared to an average maximum gain of +4.6%. That kind of risk/reward skew, spread out over an adequate sample size, makes me sit up and take notice.

Despite the big upside of the past couple of days, it's not being reflected in the first sentiment survey we follow to be released this week. The AAII poll of individual investors, which takes responses through Wednesday evening, actually showed an increase in the number of bearish respondents, which was exceedingly high to begin with.

That pushed the four-week average of the AAII Bull Ratio down to 37%, the lowest value in over a year, and on a par with the very lowest readings in the past decade. Prior times when it dropped this low were September 1998, July 2002, October 2002, February/March 2003, April 2005 and June 2006 - a veritable "who's who" of months that marked intermediate-term lows.

The survey goes back a little more than 20 years, and checking for times when the four-week average got approximately this low, it turns up a lot of positive results. The average one-month forward return was +1.9%, with 70% of them positive, and the three-month return averaged an impressive +7.4% and an astounding 95% of weeks showing a positive return (60 out of 63). Many of those were concentrated in 1990, but even the defined bear-market examples showed positive intermediate-term returns.

Given the AAII poll, the Stock/Bond Ratio, the oversold breadth figures and the constant stream of other data we've gone over during the past couple of weeks, there's no question in my mind that we reached a severely pessimistic intermediate-term condition. Now we have very solid evidence of the "lift-off" phase of a potential longer-term rally given the past two days' performance - not only the skewed up volume ratio we discussed above, but also the six-month-low-then-two-1%-days data we went over yesterday.

Oversold conditions + explosive short-term rally + positive seasonality = one of the higher-probability long setups we're going to find. It would have been nice to finally see a "puke" session with true panic readings and new 52-week lows hit 800 or more, but hey we can't always get everything.

So now the quest becomes trying to find a good risk/reward entry for those who didn't buy into the depression from last week. We have kind of mixed data as to what to expect in the short-term - some studies like the 90% up volume one above showed consistently positive returns even in the very short-term, while others I've done that look for performance after big up days show the opposite. Plus we have the STEM.MR Models in rarefied overbought territory, and that typically leads to something of a pullback or choppy conditions even during strong up-trends.

That makes it harder to understand what we might most likely see over the next several sessions, and for trading accounts I don't want to be aggressive either way. For intermediate-term investors, we got the setup and confirmation, and it usually doesn't pay to be too cute trying to time short-term entries for longer-term positions. The risk reward, even after yesterday's upside explosion, still seems heavily skewed to the upside, so I plan on taking advantage of weakness to add to intermediate-term longs. For short-term trades I'm going to have to take it more cautiously - I don't think we're going to continue to take off to the upside, so we should get a good spot in the next couple of days as some of the euphoria wears off.

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