Snapshot Notes - November 30, 2007

As of:

SPX 1490

Coming into this week, we had a laundry list of price-, breadth- and sentiment-based extremes that got even longer with Monday's whoosh down. While we didn't quite reach some of the panic readings we've seen at prior turning points, the pessimism was thick enough that any hint of a price reversal should trigger thoughts that we'd seen the low.

That probable confirmation came on Wednesday, with large price gains across the board and a huge skew in the NYSE volume figures. When we've seen that kind of combination in the past (oversold conditions, then a buying thrust), it has consistently been successful at preceding even higher prices over the next one to three months - not to mention that we're about to enter the most consistently positive month of the year.

That has set us up well for an intermediate-term rally, though the short-term is more up for grabs. We had some conflicting data on that front, between some studies suggesting a steady march higher, and others (including our STEM.MR Models) that were arguing for more of a rest.

When we got the large gap up this morning into that 1480 - 1500 zone we looked at yesterday, it seemed pretty likely that the gap would fail, at least for now. That kind of price rise, into a stiff resistance zone, just isn't often able to sustain itself.

We did see steady selling pressure throughout the day, until the last 45 minutes or so. Earlier this afternoon, I mentioned that previously when we've seen a large gap up, then a close below the open, on the last day of the month, there has been a high likelihood (15 winners out of 16 attempts) that the first day of the next month would see some gains. After that, though, the gains weren't so easy to come by and in fact the market settled down in the vast majority of cases.

Considering all that, my general outlook at this point is for perhaps another push higher early next week, then some more backing-and-filling that consolidates these gains and maybe even tests Monday's low. I don't think we'll retrace all the way there, but if we get sucked back to 1440 - 1450 on the cash S&P 500 index, then I'd consider that a pretty good opportunity to establish or add to long positions.

The latest Commitments of Traders data, released late this afternoon and including positions as of this past Tuesday, showed that commercials hedgers (aka the "smart money") reduced their overall net long exposure from about $10 billion to just under $8 billion. That's not a major change and I'm not reading much into it.

I've been noting these hedgers' positions in the Nasdaq 100 futures for the past couple of months, and they've been right on the money when they hit extremes. They became net short to an historical degree in October, and have been covering on the way down. Still, they haven't quite reached an extremely net long position, with their current positioning valued at a nominal $2.6 billion. I'd like to see it reach $3 billion - $5 billion to be more comfortable with the idea that this smart money group had strong conviction on the long side.

As of:

SPX 1490

HELP ARCHIVE

Yesterday and this morning, I went over the idea that a move to 1480 - 1500 in the S&P 500 seemed a better selling opportunity than anything, given the short-term studies we went over and the potential that that area was home to some technical resistance areas.

The index opened in that zone, and has seen steady selling pressure since. Ironically, this has carved out a potentially interesting pattern heading into December.

I checked for any time over the past 12 years that it gapped up at least 0.5% on the last day of a month, but then closed below its opening price. Buying at that close and holding through the first day of the month resulted in 15 winning trades out of 16 attempts, with an average return of +0.9%. The average maximum drawdown on the first of the month was -0.5% compared to an average max gain of +1.5%.

Those positive vibes didn't last long, though. Over the next couple of days after the first of the month, the S&P put in a negative performance 10 out of the 16 times, by an average of -0.6%. So any short-term spike based on new-month inflows quickly stalled and was often given back over the next few sessions.

That correlates well to another study I went over this morning, which suggested perhaps a bit more follow-through, but then some giving back of these gains. Given those precedents and the probable resistance at this 1480 - 1500 zone in the cash S&P index, I think any short-term pop to start the month is more than likely to be only temporary.

That doesn't say anything about the intermediate-term, which remains skewed hard to the long side. Nothing I've found over the past couple of days diminishes the probability that we'll see higher prices over the next one to three months, so I would consider short-term weakness during the first week or so of December to be an opportunity to establish or add to long positions.

As of:

SPX 1490

HELP ARCHIVE

Good Friday morning...We begin the day with a large gap up open, coming on the heels of three consecutive up days. Buying into that kind of gap and holding 'til the next day's close has led to only 2 winning trades out of 7 attempts in the past decade.

During the past couple of weeks, we went over an increasing number of extremes among the guides that we follow, culminating on Monday. The one missing piece to the "end of year rally" puzzle was some kind of confirmation that buyers were interested enough in stocks' value to overwhelm the persistent selling pressure.

We got that confirmation on Wednesday, in terms of back-to-back 1% up days, and two 90% up volume days within a week's time. Looking independently at historical performance following those two developments, when coming after an extended decline, we saw positive results going forward in both the short- and intermediate-term.

So we had a situation where we had a good long setup (severely oversold and pessimistic conditions), followed by a price and breadth thrust, while heading into the most consistently positive month of the year. That was good enough for me to suggest that intermediate-term traders not worry so much about short-term timing, and plan to see higher prices over the next one to three months.

The short-term was trickier for those not already long going into the past few days. Historically there has been a very high incidence of markets going back to test lift-offs from lows (13 out of 16 times according to one look we went over yesterday). While we had some conflicting data - some suggesting further short-term gains, others suggesting the opposite - it seemed a better bet that another push higher wouldn't be sustained.

Taking another look at the recent activity, I checked for any time in the past 20 years that the S&P jumped 3% or more in the few days leading up to the last day of a month, then gapped up at least 0.5% on the last day. There were six occurrences that popped up, and the S&P managed to close higher than the open five of those times by an average of +0.3%. However, after every instance, those gains and more were given within a week of the new month. We saw this kind of price setup heading into November 1997, December 1997, October 1999, October 2000, April 2001 and July 2002.

I mentioned yesterday that if we happened to see a move toward 1480 - 1500 in the cash S&P 500 index without more of a rest first, then I would not expect that to hold up over the coming days, and this morning's look at things makes me more confident in that view.

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