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TUESDAY, DECEMBER 18, 2007
Intraday Reversal is a Decent First Step
12/18/07 4:15 PM EST
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As of: SPX 1440 |
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Yesterday's selling pressure, coming on the heels of even more pressure during the prior few days, had pushed us towards taking a few different looks at "oversold in December" statistics.
No matter which way we went over the data, all of them pointed to very solid and consistent positive returns going forward, assuming one holds through the first couple of sessions in the new year. The success rates on the studies we went over varied from 80% - 100%, as they reflected not only the tendency for broad stock indices to snap back from extreme short-term movements, but also the end-of-month/beginning-of-month phenomenon and of course the Santa Claus effect.
With a little good news to begin the morning, the futures markets responded positively and we began the session with a large gap up opening. Perversely, that's exactly the kind of thing bulls don't want to see, and today provided yet another example of why. Large gap opens against the immediate trend tend to snuff out the weak holders, and the gaps end up fading a high percentage of the time.
Today's failure was more severe than I thought we'd see, as we violated yesterday's low and several sectors hit multi-month extremes. As I mentioned earlier this afternoon, though, we had reached a point where it seemed likely that any additional selling pressure would most likely be temporary and the risk/reward had again tilted to the long side.
Today's afternoon reversal again hands the ball over to the bulls, so we'll see if the buyers have enough interest to keep propelling us higher. Buying any sign of strength lately has been a recipe for disappointment and losses, and traders are understandably gun-shy. It will probably take more rallying, and modest consolidation, before we can more "safely" add any additional long exposure through the end of the year. We're quickly approaching the time of the year that "everyone" knows has a positive bias, and some stabilization here is exactly what we need to follow through on some of the bullish indications we've been discussing.
Have a great night and we'll see you tomorrow!
That's Why I Hate Gaps
12/18/07 1:10 PM EST
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As of: SPX 1440 |
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I mentioned this morning that I wasn't a fan of opening gaps in the direction I'm looking to trade due to their unfortunate tendency to fail, and we saw that yet again this morning.
Frankly, I'm surprised by the severity of the pressure, as all the major indices took out yesterday's lows, and some sectors are hitting new multi-month lows. The banking sector is the most worrisome here, as the group has not been able to sustain any kind of bounce despite the extremely stretched nature of the selling over the past week.
Everything I've looked at for that groups suggests strongly that it is washed out and should bounce over the next week, but we were getting similar (though not quite as strong) indications of that a few days ago, and that has not worked. A bounce in the banks would give a much-needed shot in the arm to the major indices as well, so I want to see the BKX Banking Index re-take its November low at the 88 level to have more confidence that we can sustain a reflex bounce in the broader indices as well.
I've gone over a bunch of "oversold in December" stats, and heaping on any more would just be overkill, so I'll hold off. Suffice it to say that we've seen enough pressure that historically, buying into this kind of mess and holding through the first couple of days of the new year have provided an exceptionally strong and consistent bullish edge.
Shorter-term, there is reason to expect some imminent relief, that being the looming option expiration. Over the past two years, Wednesday has by far been the most positive day of option expiration weeks, with a positive return 19 out of 24 months.
Like I noted, some kind of confirmation that we've at least temporarily hit bottom would be welcome, whether that be a reclaiming of the 88 area by the BKX, or a lack of new intraday lows this afternoon in the S&P, but I expect any further weakness to still be temporary only and regained in the coming days and week(s).
December Sell-offs Have Been Good Opportunities
12/18/07 9:10 AM EST
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As of: SPX 1457 |
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Good Tuesday morning...We begin the day with a large gap up opening in the major equity indices, after a slug of seemingly positive news regarding central banks, investment banks, and housing - all the financial-related stuff that has kept dragging us down.
Yesterday I went over a couple of stats related to the current selling pressure, and they were very intriguing. I spent a good deal of time last night looking at different angles, and they all turned up the same thing - all were solidly bullish going forward.
For instance, there have been 10 years in which the S&P 500 showed a 4% or greater loss during a 5 day period, with at least the last day of the five being sometime in December. Buying at the close that day and holding until the second trading day of the new year resulted in 10 winners out of those 10 trades, with an average return of +5.8%. The maximum drawdown averaged -2.4% while the maximum average gain averaged +6.5%.
December declines that were less dramatic but still enough to drag the 3-day Relative Strength Index (RSI) below 15 were still good buying opportunities. There were 33 years where that happened, and buying those closes and holding until the second trading day of the new year gave 29 winners (88%) with an average return of +3.0%. The average maximum loss during the trades was kept at -1.7% while the maximum average gain was more than twice as large, at +3.8%.
I got very similar results when looking at new two-week lows during December, or consecutive 1% losses. The bottom line is that buying into extreme price declines - however one defines that - during the month and holding through the first couple of sessions of the new year has proved very profitable on an extremely consistent basis. The trades were not without risk, but the drawdowns tended to be small, and certainly much smaller than the average reward.
I mentioned yesterday that the main thing holding me back from buying into these stats was the market's inability to rally from short-term oversold conditions last week. Granted, a big part of that failure was due to Wednesday's opening gap, which skewed the models and made reading much into it a difficult proposition, but still - we should have rallied after Wednesday and Thursday.
To enter longs again, I either wanted to see more of a decline towards 1440 (preferably on a gap down opening) or some confirmation that price was beginning to recover - which was also a questionable wish, since I couldn't pinpoint anything that would help me determine that we were seeing confirmation.
A big gap up open is definitely one scenario I did not want to see, but that's what we have to deal with here. I detest trying to trying to take a position into gaps since they have such a consistent tendency to fade back (especially when we open right at potential resistance which it looks like we may do today), so I'll be looking for an early-morning pullback to re-establish some core positions, with an expectation of holding them into the new year based on the studies we discussed above. I'll be trading around them, but I want some core longs to take advantage of what I think is a solid edge.
All the best,
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
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