Snapshot Notes - April 24, 2008


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THURSDAY, APRIL 24, 2008

Rotation Into Stocks Not a Reliable Signal

04/24/08 2:10 PM EST

As of:

SPX 1375

HELP ARCHIVE

After bouncing again near the 1370 area, the S&P 500 has rebounded strongly going into the afternoon, tacking on more than 20 points from the day's low.

When looking at the different asset classes, it's apparent that we're seeing a pretty sizable shift today. Just because bonds may be down and stocks up, it's awfully simplistic to suggest that money from bonds is necessarily flowing to stocks, but certainly some of that is the case.

Regardless, I checked the past 15 years to see if we had ever seen a day where Crude Oil was down 2% or more, the yield on 10-year Treasuries was up 2% or more, and the XBD Broker/Dealer Index was up 2% or more all on the same day.

There have been 13 such instances since 1993 The past occurrences are detailed in the table below, including the performance in the S&P 500 going forward.

There isn't much of a pattern that I can find among the other occurrences. The instances during the past bull market from 2003 - 2007 did a pretty good job at highlighting decent times to stay invested in equities, but other than that the record was mixed. The last "signal" from January was surely a bad one in terms of suggesting that this kind of one-day rotation was a sign of more equity buying to come.

If we back out some of the parameters, and look only at large gains in the Broker/Dealer Index, or the gains in Notes or drop in Oil, we get pretty much the same thing - inconsistent results going forward.

The S&P 500 has climbed back to that 1400ish area that many traders are using as a resistance level. The index has been beaten back after each of its other attempts to overtake that area, but this time we have nice-looking breakouts in the Nasdaq 100 and DJIA that may help engender some support. Microsoft should have a say in whether this continues or not after they release their earnings, but despite its heavy weighting in many of the indices, that company doesn't often trigger the kind of emotional responses that other firms do.

It will be instructive to see if the S&P can finally bust through 1400 - 1405 on this attempt or whether it will get rejected again. The short-term guides that I find most reliable aren't given many hints at which is most likely at the moment, and I'm still finding a lack of edge among the other studies that I've done. About the only setup in the major indices I see possibly coming down the pike would be a potential short sale in the Russell 2000 if it can't make it over the 720 level and the other indices roll over, or a long if the S&P busts out over that 1400 area and then settles back down. Neither one seems imminent.

A Small Sign of Too Much Optimism

04/24/08 9:15 AM EST

As of:

SPX 1375

HELP ARCHIVE

Good Thursday morning...We begin the day with the pre-market futures slightly positive at the moment. They came off their lows of the morning after a bout of better-than-expected economic numbers hit the tape, and traders had more of a chance to digest the deluge of earnings reports. The S&P futures are more than 10 points off their lows; the Nasdaq 100 futures more than 20.

Back in March, we spent a good deal of time going over studies that suggested that unless we were about to see something we've never really seen in the past 60 years, then we should be about to witness a one to three month rally of 5% - 15% in the major equity averages.

While it was dicey there for awhile, we have pretty much met the targets from many of the studies we had discussed. But even so, I haven't been able to find much that suggested that this intermediate-term rally phase should be coming to an imminent end.

One possible exception is the exceptionally low volume that has plagued the markets recently. While shorter-term in nature, I showed on Monday that extremely low volume during down-trending markets tends to resolve itself with lower prices.

Other than that, I haven't seen many signs that the rally - or the perception surrounding it - had entered the "too much, too fast" stage, where we begin to witness multiple signs of excessive optimism.

One of those signs has just popped up, but it's relatively minor. The American Association of Individual Investors (AAII) released its latest survey today and showed that its members have greatly reduced their caution towards equities. The percentage of respondents with a negative view of the market dropped to 28% this week, the lowest reading since last fall.

The chart above shows the past few years of history for the bearish percentage in the survey, with red arrows highlighting those times that the indicator poked out of its trading bands. Over the years, there has been a clear trend in this data, so using relative trading bands like we present on the site has proved to be more useful than using static, absolute levels.

While 28% bears isn't all that extreme historically, on a relative basis it's on a par with some of the more extreme readings we've seen over the past several years. And as the little red arrows on the chart show, past instances have mostly led to some trouble for stocks.

This is just one initial sign of a bit too much of a preference for stocks - the other surveys and real-money gauges we follow are still mostly neutral. But this is the type of thing I'm continually watching for, and if more of these begin to show, then I'll have to turn a more jaded eye towards the likelihood of further sustained gains.

Shorter-term, I showed a table yesterday of the performance of the tracking funds for the S&P 500 (SPY) and Nasdaq 100 (QQQQ) after Apple earnings reports. Generally, the short-term reaction in the Nasdaq 100 was negative, at least over the next day.

If QQQQ gapped lower by any amount the day after Apple's earnings, then from the previous day's close to that day's, it lost an average of -1.0% and closed in negative territory 74% of the time. However, the average size of the gap was -0.8%, meaning that from the open to the close it only lost an average of -0.2%. It managed to close higher than the open only 5 out of 15 times, but the worst of the decline was usually seen at the open.

If QQQQ gapped higher, than it averaged a gap of +1.1%. The average return from open to close was +1.3%, so once again most of the move was baked into the opening gap. It managed to close higher than the open 57% of the time, but with an average return of only +0.2%.

I don't want to read anything more into these Apple earnings stats, as many traders have seemingly already moved on and it doesn't appear that it's going to have any noticeable impact on the general market. The morning's surprisingly good economic numbers could be more of a focus, and help to shake off any potential disappointment that Apple didn't stage an absolute blow-out quarter.

With all the chop we've seen since Friday's big up day, and after the market worked off the short-term negative biases we went over earlier this week, I'm left without much of an identifiable edge here. I haven't been able to turn up anything that has provided consistent enough results to suggest there's a solid bias either way, so I'm remaining flat on a trading basis and waiting for a better opportunity.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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