Snapshot Notes - April 17, 2008


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THURSDAY, APRIL 17, 2008

Lack of Follow Through?

04/17/08 9:15 AM EST

As of:

SPX 1346

HELP ARCHIVE

Good Thursday morning...We begin the day with a fairly large gap down in the major indices, as the pre-market earnings reports were a tad disappointing and that's usually enough to trigger some concern after a day like yesterday.

Some of the bigger winners yesterday were transportation stocks, with the transport indices nearly doubling the gains in the broader market. A lot is often made of the relationship between the Dow Jones Industrial Average and the Dow Jones Transportation Average. I've looked at the movements between the two averages on occasion over the years, but have never found much of use, especially in terms of the Dow Theory concept. There are many respectable technicians who swear by it...I'm not one of them.

Regardless, the Transports had a huge day yesterday and broke out to a new six-month high. The Industrials, on the other hand, remain nearly 10% below their own six-month high. That's quite a divergence.

In fact, it's such a divergence that it's only happened two other times in the past 70 years - July 19, 1950 and December 26, 1973. Both instances gave investors hope that the correction the averages had been suffering was over, as both times the DJIA was higher a month later by an average of nearly 4%.

Only the 1950 instance followed through, however, and kicked off fantastic gains for long-term investors. The 1973 occurrence chopped around in a wide range for three months before rolling over into one of the worst periods in market history - the summer and fall of 1974. There isn't anything I can find that's consistent about the two occurrences on any time frame, and I can find no edge for us going forward.

Yesterday, I mentioned that Rydex traders had all but abandoned the Technology sector, with those funds garnering only 3% of all sector assets while Energy, Basic Materials and Precious Metals were sucking up most of the money. Yesterday's trading didn't change that much at all, but we did see a general interest in the funds pick up steam.

A month ago, at the March lows, only 15% of the Rydex sector funds had assets that were above their 50-day moving average, showing a general sense of apathy among those traders. After yesterday, however, that figure jumped to 61%, the highest level since October 31st. We need folks to become more bullish in order to help drive prices higher, but I'm on a constant lookout for "too much, too fast". I've seen scant evidence of that so far, but this is one indicator that could serve as an initial warning sign. I'm not reading it that way yet, but I'll be watching it if we continue to rally in the days ahead.

For the short-term, we're getting a fairly stiff pushback from yesterday's trend day, marking one of the relatively few times that the market is not going going to gap higher after a performance like yesterday. Going back over the history of the S&P 500 tracking fund (SPY), I can find only five other times that it gapped up 1% and tacked on at least another 1.5% during the day, then gapped down at least 0.5% the following morning, as it's indicated to do today.

Buying that open and holding 'til the close led to mixed performance. But hanging on for other day resulted in all five trades being winners, averaging a hefty +2.1%. After a week, all five were still positive by an average of +3.6%, and two weeks later we still had five winners with an average of +5.2%. I would much prefer more than five occurrences to consider this a solid edge, but for those curious the dates were 4/30/97, 10/20/00, 4/6/01, 10/14/02 and 10/16/02.

Yesterday was an absolutely classic trend day, adhering to all the signs I look for and that we went over yesterday morning and afternoon. As I noted going towards the close, though, our shortest-term guides were getting quite stretched and I didn't feel the need to press my long positions to pick up perhaps a few more pennies, so my intention was to lighten my exposure going into the close.

With this morning's gap down, I don't see any good reason to make additional changes one way or the other - I'm still carrying some very modest longs from when I was buying a couple of days ago, and also some intermediate-term long positions, but I neither want to sell nor buy more into this gap. I don't think we're going to roll right over into a resumption of the downtrend, but I also don't think we're going to rebound immediately from the gap, so my intention is to just watch how this plays out for a bit.

With the overbought nature of our short-term guides, we usually get pretty choppy trading for several sessions afterwards, and we also have option expiration coming up, which often means choppy conditions through the following Monday. From the looks of things right now, I probably won't be making many (if any) changes - especially buying - until Monday at the earliest.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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