WEDNESDAY, APRIL 16, 2008
Indices Doing Nothing Wrong, But Reaching Overbought
04/16/08 3:15 PM EST
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As of: SPX 1346 |
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As the market follows through on some of the trend-day tendencies we went over earlier today, we're starting to get a good cross-section of overbought readings among our more sensitive indicators.
This is no surprise given the lift-off today, but it's a cause for investigation anyway. What's catching my eye the most is the Cumulative TICK for the NYSE, which has reached +4300, a high enough reading to consider it excessively overbought.
It has reached +4000 on four other days so far in 2008, those being 1/31, 2/26, 3/24 and 4/4. After each occurrence, the S&P 500 managed to drift higher over the next day or so, tacking on modest follow-through returns to the big up days that caused the high TICK readings.
But each of them also failed, with negative three-day returns following each occurrence, averaging nearly -2%. A fairly consistent pattern was that we'd see some small upside follow-through over the next day or half-day, then a dip as profit-taking kicked in, then an attempt to push higher again. Each of those second upside pushes failed, and that's when they set up better opportunities for those looking to sell these rallies short.
I mentioned earlier today that it would be unusual to see the market back off a lot after the indications of a trend day that we were seeing, and so far the indices have done well by hanging on to their earlier gains and going along with their precedents. I showed a table this afternoon showing Nasdaq 100 performance during the afternoons of trend days, and how it held up from noon into the following morning 14 out of 14 times since 1999.
Now that it looks like we have a good chance at making that 15 for 15, I want to dig a bit deeper. When we've gotten these kinds of trend days in the past, the Nasdaq 100 has gapped up the following morning 10 out of 14 times, the S&P 9 out of 14.
Selling into those gaps was usually a good idea for very short-term traders. Buying the open the following morning and selling after the first hour of trading resulted in only 2 winning trades out of the 14 trend days on the S&P, though the NDX held up better with 9 winners (but a very small overall average return).
I don't want to get too buried in the these ultra short-term stats, so the most important thing to take away was that if the market followed through early in the morning after one of these trend days, then selling pressure typically kicked in soon thereafter. Chasing a move like this - particularly if the markets gap up the next morning - is rarely a good idea in the short-term.
With our short-term models now showing the opposite readings from what they were giving over the past couple of days, I'm not all that interested in pressing my existing longs, and will likely lighten up heading into the close. The indices have done absolutely nothing wrong, but large rallies in downtrending markets have not had a good track record at giving us a lot of follow-through, and I see little sense in trying to eke out what may just be a few more pennies. I'll continue to hold the long positions I've been holding with an intermediate-term time frame, but for the short-term I'm inclined to begin backing off soon.
Trend Day Conditions Met So Far
04/16/08 12:45 PM EST
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As of: SPX 1346 |
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Before the open this morning, I mentioned that there seemed to be a decent chance for us to carve out a "trend" day to the upside today, especially focused on tech-related indices.
There were a few reasons for that, but most importantly I wanted to watch the first hour or so of trading to see if the gap opening would hold. If we saw strong breadth, buying interest when the TICK fell back to 0, and limited pullbacks when the TICK hit +1000, then the odds of us closing at or near the day's high should increase.
We've met all the conditions I look for in a trend day, so I'm going with the idea that it would be exceptionally unusual for us to see a substantial negative reversal today. The table below helps to explain why - it shows all days when NYSE breadth was +2000 or greater (which it is today) at noon Eastern time, and the returns in the Nasdaq 100 going into the next day's open.
Out of 14 occurrences since 1999, all of them returned positive numbers. Actually, they all would have been positive just looking at returns into that day's close, but we often saw the market gap up the next morning following trend days like this, which helps the return.
On average, the NDX was able to tack on another 0.8% or so heading into the next open, so while the bulk of gains have likely already been seen and I don't expect much more upside, I wanted to highlight the fact that it would be highly unusual to see the NDX give back any more than about 0.5% of this morning's gains going into the close.
We do have some major earnings after the close, of course, so that will be a factor as well. While the market does not necessarily gap down any more during earnings season than non-earnings season as we discussed on Monday, it's always a concern after a run like today (assuming we hold up into the close).
As of now, I'm not changing my positioning much, based on the idea that markets this strong this late in the day tend to stay that way into the close. If we do anything outstanding, I may trim some of my longs - a strong run higher should usher in the urge to take some profits, while a negative reversal would be something we haven't seen before on these kinds of trend days, and that would be troubling (if the NDX falls back below 1825ish, I'll start to worry more).
Whaddya Know...Intel Actually Delivered
04/16/08 9:15 AM EST
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As of: SPX 1346 |
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Good Wednesday morning...We begin the day with a large gap up in the major indices as the reaction to Intel's earnings report has been very positive. A few more relatively good reports this morning, and mostly in-line economic data has pushed the pre-market futures to the highs of the morning.
The last time Intel gapped up more than 5% was way back in 2003. Historically, whenever INTC gapped open 5% or more, the Nasdaq 100 (NDX) also gapped up every time, by an average of +3.6%. The return from the open to the close in the NDX was mixed, closing higher 48% of the time by an average of +0.3%. Returns from one to three days later were in line with random.
One of the reasons I've been concentrating on the Nasdaq 100 for long positions over the past couple of days is that despite it holding well fairly well relative to the other indices, sentiment towards the sector is still depressed. If you pull up some of our Rydex sector charts for technology-related funds, like the Rydex Internet Fund, you'll see a pane at the bottom of the chart that shows us how much money is invested in technology-related funds as a percentage of total Rydex assets.
Yesterday, that percentage fell to 3.3% of all assets, a new all-time low using data back to May 2000. The only other time that comes close to this few assets in technology was August 8, 2006, which proved to be the end of that correction in the tech sector.
Assets clearly aren't in technology, so where are they? It's no surprise that they're concentrated in the best performers - Energy, Basic Materials and Precious Metals. Rydex traders gravitate towards what they perceive as the best trends, and they've been treated fairly well in those sectors, but each of them are bumping up against their historical highs as a percent of total assets.
Looking at large (+1.5%) gaps up in the NDX, there isn't much of a pattern I can find suggesting an edge either way. The last two times we gapped up this large, on 3/18 and 4/1, we continued to grind higher throughout the day, tacking on another 2.5% each time between the open and the close. Given the small intraday ranges of the past two days, there is the potential for another trend day today, so I'll be watching a few things carefully during the first hour.
Namely, I want to see buying pressure come into the market every time the NYSE TICK approaches the zero line, and if we get +1000 TICK readings, then the S&P 500 shouldn't back off any more than 2 or 3 points. We should also see all major sectors participating in the early going, with extremely positive breadth. If we can maintain that through the first hour of trading and set higher intraday highs going into mid-morning, then we should have a good shot at closing at or near the day's highs. I don't like gap opens, as they are emotional traps that too often trigger a counter-reaction, so I'll be watching the early going carefully.
All the best,
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
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