Snapshot Notes - December 27, 2007

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THURSDAY, DECEMBER 27, 2007

Market Finally Working Off Those Overbought Readings

12/27/07 3:30 PM EST

As of:

SPX 1483

If you go to the Seasonality section of the site and click on the link for "Performance by Day of Year", it will bring up a table which you can sort according to the fields at the top of the table.

If you then click twice on the "% Pos" field, it will sort the table by the percentage of time each day has closed in positive territory, using S&P 500 data since 1950, with the most consistently positive days at the top and the most consistently negative days at the bottom. Some browsers may not support this functionality, but IE7 and the latest Firefox do.

The first day that pops up is "2", meaning the second trading day of the year. That has shown a positive return 74% of the time, and it also has the highest average return of any other day of the year.

When we got all of the "oversold in December" stats last week, that's why I kept harping on the idea of looking through the first couple of sessions of the new year - that 2nd trading day of the year tends to be the most positive of any.

I took another look at a similar study today, this time looking for any time the S&P sold off at least 1% on any one of the last three days of the year. Buying at the close of the -1% day and holding through the 2nd trading day of the new year resulted in five winners out of five occurrences (obviously this kind of selling pressure is rarely seen when so many folks are away on vacation).

The vast bulk of the gains occurred on that 2nd day of the new year, so there was no hurry in buying after the 1% down day. For example, if you had sold at the close of the first trading day of the year, you would have gained a total of only 1 point in the S&P. Selling after the 2nd day would have netted you 88 points across the five trades. Selling after the 3rd day would have given you 101 points, and then the returns dropped off precipitously the longer you held.

I've been looking for another opportunity to exploit this phenomenon, and we're getting close to that spot. Our short-term guides have finally dropped well out of overbought territory, which is a welcome change from the past couple of days. I'm in no hurry to rush back in (again, the real positive seasonality isn't until the first few sessions of the new year), but I will be looking for another low-risk entry on the long side as we head into that time frame if we get some solid oversold readings prior to the end of the year.

Conflicting Signals Indicate Yet More Chop Ahead

12/27/07 10:25 AM EST

As of:

SPX 1483

HELP ARCHIVE

Good Thursday morning...We begin the day with some moderate weakness in the major equity indices off of the turmoil in Pakistan and weak economic numbers, but buying interest has already come in and taken us off the lows. Banking shares continue to erode, and the sectors I watch are being led by the "evil twins" of gold and oil - not the best combination for the broader stock market.

For the past few days, I've been torn over the battle between overbought short-term conditions and seasonality. The former has been arguing for choppy conditions (at best) while the latter has been suggesting an overall positive bias into early next year.

I've been going over many studies during the past couple of days, trying to find some historical precedent for being so overbought during such a consistently positive time of the year. There certainly are precedents, in fact it is not rare to see stretched conditions during holiday periods.

But we don't need something that's just descriptive - we need to find something that is predictive to help us decide where the risk/reward lies over the coming days. And those historical precedents weren't any help in that regard, as equities tended to go up as much, and as often, as it went down following similar circumstances.

That's the case not only in the short-term, but we can find similar contradictions among some of our more intermediate-term measures as well. The sentiment surveys are a prime example, as we have the Investor's Intelligence survey showing responses that are well into "excessive optimism" territory, at the same time we see the latest AAII survey of individual investors showing one of the more pessimistic outlooks we've seen this year.

During times like this, when it seems as easy to make bullish arguments as bearish ones, I prefer to stay out and not risk capital on poorly-defined edges. That's been the case for the past couple of days, and is most likely going to continue to the end of the month unless we get some selling pressure soon that alleviates some of these overbought conditions, such as those indicated by the STEM.MR Models.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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