Snapshot Notes - December 6, 2007

As of:

SPX 1490

For the past couple of days, despite some impressive point gains, we weren't seeing too much in the way of investors jumping on board the rally.

Most of our most sensitive indicators remained in neutral territory right through the early afternoon today, and given the enthusiastically bullish setup we've been discussing for the past week+, there wasn't much reason to expect the rally to stop anytime soon.

With the persistent spike during the late afternoon today, though, that changed and by the close all of our shortest-term guides were overbought - including the STEM.MR Model for the S&P 500. When the model last hit overbought, one week ago today, we saw a large gap up on Friday morning. Like most times when we get a gap up open with overbought conditions, that gap faded and closed during the next few sessions

If the market likes the jobs report tomorrow morning, and we see a similar gap up, I suspect we'll ultimately face a similar reaction. Extreme moves in reaction to a jobs report have a very strong tendency to reverse, and I would be looking for that to continue with a gap up tomorrow morning given the stats we went over earlier today.

I can find only one other time during this bull market that the S&P was up at least 1% for two straight days leading into a report, and that was 11/05/04. While it didn't necessarily lead to a negative reaction, the S&P just kind of sat there for four days trying to digest the gains.

I guess the best-case scenario at this point would be a big gap up open, then a several-day consolidation that manages to hold above this 1480 - 1500 zone that had proved difficult to overcome. Next week's FOMC decision will have a big impact on whether we see anything as tame as that, but being aggressively positioned into an overbought market in front of a couple of big economic unknowns doesn't seem the wisest course to me.

None of this distracts from the intermediate-term, which continues to look healthy. The S&P has already climbed nearly 7% from last week's lows, and many of the studies we had gone over prior to this up-leg were suggesting moves between 5% - 10% over the next one to three months, so I'm not sure how much more we can reasonably expect without another round of short-term pullbacks. I still like our setup heading into the new year, I just don't want to get too carried away near-term.

On a side note, I've received a few questions about our "site position" indicators, of which the short-term one has been neutral during this rally, despite near table-pounding bullish commentary from me.

Shouldn't the two be more in sync? Well, yes - their purpose is to be a quick-glance summary of whether the commentary is leaning one way or another, and to what degree. So I have to apologize for that...I've been so busy training a new employee and concentrating on our managed accounts that I have let that slip. Now that we're getting into more of a groove on both fronts, I will strive to make those icons a better representation of the comments going forward.

As of:

SPX 1490

HELP ARCHIVE

We've seen quite a ramp higher over the past hour, with all the major equity indices hitting new intraday highs and the S&P 500 now testing that nice, round 1500 area.

Yesterday and this morning, there wasn't much of anything I could find that faulted the current move, which suggested still higher prices ahead. There are a couple of minor quibbles I'm starting to see now, though, including that 1500ish area on the S&P. That's a big focus, and may be enough of one to cause resistance.

Our short-term guides have been perking up over the past few hours as well, with the STEM.MR Model for the S&P beginning to flirt with its "excessive optimism" level. Technically the model doesn't give a sell signal until it reaches that overbought area and starts to curl back down, so we'll see if it makes it there yet today.

Tomorrow morning we'll get hit with the monthly jobs report, and that could be market-moving due to the looming FOMC meeting next week. A strong report might actually be construed as a negative since it may reduce the Fed's incentive to lower rates by as much as the Street seemingly wants. The news itself may be not be as important as the reaction (at least for traders and investors), and as we go over almost every month, an extreme reaction to the report will more than likely set up a "fade" - a move in the opposite direction of the initial reaction over the next couple of days.

It's relatively rare to see the markets with consecutive up days heading into a payroll report - I can find 22 since the bull market began in the fall of 2002. Buying at the close of the second up day (today's close in our current situation) and holding through the close of Friday led to only 43% successful trades in the S&P, with an average return of -0.2%, and 40% success in the Nasdaq 100, with an average return there of -0.3%. Ironically, it would be especially bearish if we gapped up somewhat large tomorrow morning (0.5%) or more, as both indexes closed higher than those opening prices very, very rarely (1 time out of 4 for the S&P and 2 times out of 7 for the NDX).

I still very much like the way the markets are acting since last Monday, and continue to believe that we have still-higher prices to come over the next few weeks. But as we now enter a time of potentially market-moving economic events, with soon-to-be-overbought short-term conditions and some possible resistance, I'm pulling back a bit. The next best opportunity would seem to come with the S&P decidedly taking out this 1500 area, then consolidating for a day or two above it.

As of:

SPX 1490

HELP ARCHIVE

Good Thursday morning...We begin the day with some moderate follow-through to yesterday's rebound, with all eyes on the S&P and it's overhead resistance looming immediately overhead. Housing, Technology and Financials are doing well, while Retail is lagging badly.

We left off yesterday with more confirmation that higher prices are likely in the intermediate-term offing. With the buying spurt we saw last week, on the heels of severe oversold conditions, during the most consistently positive month of the year, and a slingshot rally out of a short-term consolidation the past few days, I'm not sure how the setup could look any more classic.

We're seeing some signs of a recovery in the depressed sentiment levels of the past couple of weeks, with the latest AAII poll of individual investors moving back to almost exactly neutral after a couple of weeks of severely pessimistic readings. We can also see that by the renewed flow of funds out of the short-side Rydex mutual funds and ProShares ETFs. Increasing bullishness is not a bad thing - in fact, it's essential to see if we're going to keep rising, as long as it doesn't become extreme.

Even with yesterday's rebound, there wasn't enough "juice" to move our most sensitive indicators into overbought territory, so as I said last night, I can't find much of anything that should serve to put the brakes on this rally attempt. That doesn't mean new entries are easy or even low-risk, though, after the large point gains from yesterday and now again this morning.

For those not already long, the best bet would seem to lie with either waiting for another round of oversold readings (at whatever price level that may come), or waiting to see if the S&P 500 can overtake that 1480 - 1500 zone that has stopped several prior rally attempts. If it does, and consolidates above there, then that should also set up a decent long entry as late-arriving buyers see the breakout and want to get in.

We likely wouldn't see that until next week, though, which of course runs into the FOMC meeting. As it stands right now, I continue to find very little in the short-term that argues strongly either way, so I'm just letting this play out and not making any changes to my outlook.

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