Snapshot Notes - December 7, 2007

As of:

SPX 1509

My young sons have been taking karate lessons for the past couple of months, and they're testing for their next belt level tonight.

They seem to be ready, but my youngest is still a little timid with his "kiai" - basically a forceful yell that helps to focus their attention and strengthen their moves. As his instructor repeatedly reprimands him, "The more intense your focus, the greater the outcome."

Coming into this week, we had some of our shorter-term guides having no problem with their kiais - they were severely overbought and yelling forcefully for some relief. The four consecutive up days to end the week was enough to push many of them into rarefied territory.

That relief came during the first couple days of this week, with some moderate selling pressure that didn't clip too much from the major indices. It was enough, however, to push some of those short-term guides into oversold territory on the Nasdaq 100, giving a pretty good long setup.

The markets responded well to that, jumping strongly over the next couple of days and leading again to a round of overbought readings. When we see those kinds of conditions heading into an economic release, then get a gap up opening in response to that release, it tends to set up weakness in the short-term, so I wasn't expecting us to go much of anywhere to the upside after that gap open.

We didn't really get anything going for buyers...or for sellers, for that matter. The indices instead just chopped around in an exceedingly narrow range all day. That's unusual for a jobs report day - in fact, I could find only four other such instances in the past five years. Like many narrow-range days do after a rally, those instances led to weakness in the short-term.

So while we may get some additional chop or weakness heading into next week's FOMC decision, as far as I'm concerned it's a bit pointless trying to game the short-term after that. In the hours after those decisions, stocks tend to whip around so much that it erases the past several days' worth of gains or losses, so that's one news event I'd rather react to instead of anticipate. If we get an extreme move either way off that Fed decision, then there may be an opportunity for us to go the other way, but there's no telling what that might be ahead of time.

On a longer-term basis, the broader market has acted wonderfully since last Monday. We have seen classic bottoming behavior, and about the only things bothering me about it is that we have rallied so strongly, and we're seeing a fairly quick about-face in sentiment. The S&P 500 has jumped about 7% since the low, which is right in the 5% - 10% zone that many of our studies were suggesting was likely. I'm not sure how much fuel is left after that kind of a run, but until I see some evidence that the market is doing something "wrong", I'm going to give the possibility of a further year-end run the benefit of the doubt.

The latest Commitments of Traders report, released this afternoon and covering positions as of this past Tuesday, was mostly unremarkable. Both "smart money" commercial hedgers and "dumb money" small speculators added to their net long positions in the major index futures, and I don't see anything particularly compelling there.

I've been mentioning hedgers' positions in the Nasdaq 100 for the past couple of months, as that group has been right on the money when they've reached extremes over the past several years. This week's report didn't bring anything particularly exciting, as that group of traders dropped their net long exposure a bit from the prior week. It now stands at just over $2 billion - still a moderately positive sign, but they never reached the $3 billion - $5 billion area they established at prior lows.

As of:

SPX 1509

HELP ARCHIVE

Over the years, we've discussed frequently the concept of narrow-range days, and how they tend to lead to lower prices rather than higher, especially when the market has rallied leading into them.

We're seeing such a day today, as the major indices have been stuck in a very tight, choppy range all day long. Since the low in the fall of 2002, I can find only four other days where we got an NR7 day on the day of a jobs report (an NR7 day is one with the narrowest intraday range, from high to low, of any other day of the past seven trading sessions). All led to short-term pullbacks, with the S&P 500 lower a week later all four times by an average of -1.1%. For those curious, the dates were 04/04/03, 07/02/04, 05/06/05 and 02/02/07.

Some further short-term consolidation or weakness would fit in with some of the other studies I've been looking at, such as gap opens on a jobs report day, short-term rallies leading into an FOMC decision, etc. Of course, we can pile up all the stats we want, the market is still going to do whatever it wishes after the FOMC announces its decision, and that will likely wipe out whatever gains or losses are made in the days leading up to it.

Our short-term indicators have come off quite a bit from yesterday's overbought extremes, which is a positive given how little the indices have corrected. A market that gently consolidates overbought readings is in a healthy position, so that's definitely one for the bullish side of the ledger.

All in all, it looks pretty mixed out there for the near-term. The things I've looked at surrounding the jobs report consistently pointed to lower prices ahead, but the fact that we've backed off the overbought readings without much of a hiccup is just as positive as that is negative. I think the scales may be moderately tipped to the downside heading into next week's Fed decision, but it doesn't appear to be a very strong edge.

As of:

SPX 1509

HELP ARCHIVE

Good Friday morning...We begin the final day of the week with a moderate gap up opening based on the jobs report release. It's usually spurious to assign any particular cause to a market move, but this one was pretty clear since the futures spiked right after the release and have hung around there ever since.

Yesterday afternoon, I went over some stats related to the jobs report. The most glaring property of these much-ballyhooed economic releases is that they tend to be consistent contrary indicators when looking at the initial knee-jerk reaction in stocks. When we gap up or rally hard on the heels of an economic report, then the following days under-perform; when we gap down or drop heavily, then the next sessions tend to do better than average.

The jobs report is a good example. Since the bear market low in the fall of 2002, whenever the S&P 500 has gapped up by any amount on the morning of a jobs report, it closed the day higher than the open only 38% of the time, and its average open-to-close performance was -0.2%. If the gap was larger than +0.25%, then the S&P closed higher than the gap open only 33% of the time, and the average return dropped to -0.3%.

Of those days that managed to close higher than the open, on average the S&P didn't drop more than -0.30% during the day. Of those that did close lower, they didn't gain any more than +0.25% on average. Applying that to our current situation, if the S&P is able to gain more than 5 points or so from its opening print, then I'll become less inclined to assume this gap will fade. But if it loses more than 5 or so points from the open, then my expectation is that we'll be seeing the typical "sell the news" reaction over the short-term.

Looking at the Nasdaq 100, its open-to-close return in these situations averaged -0.5% with only 25% of instances closing higher than the open (7 winners out of 25 attempts). And if it came into the morning with two consecutive positive days, then gapped up on the morning of the jobs report, it closed higher than the open only 2 times out of 13 tries, with the same average return of -0.5%.

With our short-term guides firmly overbought, and the gap stats we went over above, I've dimmed my near-term outlook considerably and I don't think we're going to get much more sustained upside from here. I still like the long side on an intermediate-term basis (though as I noted yesterday, the S&P has already pretty much met our upside projections based on the "excessive pessimism" studies we went over during the past couple of weeks), and very much like the fact that the S&P was finally able to bust out over that 1480 - 1500 zone. Some consolidation above that area over the next few days would suit us well for another possible long trade, though of course we have to deal with the FOMC reaction early next week.

As I noted yesterday, I'm going to be more conscientious with the "signal strength" icons attached to these notes. Again, please understand that they are not trade recommendations...they are meant to serve as a quick-glance reference for what the comments are saying. Given what we went over above, we're going to tilt that to the downside this morning, assuming the S&P opens around 1513.

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