Snapshot Notes - April 25, 2008


	Print Comments

FRIDAY, APRIL 25, 2008

One More Look at Volume

04/25/08 3:20 PM EST

As of:

SPX 1375

HELP ARCHIVE

One of the themes we touched on this week was the ultra-low volume we've been seeing among stocks, ETFs and the market in general. As we went over on Monday, very low volume during generally declining markets is typically not an especially good sign.

That struck me again today as I was looking the S&P 500 and Nasdaq 100 tracking funds (SPY and QQQQ, respectively) which had both gone 24 straight days with volume that was below their 50-day averages. That is an exceptional stretch that has been matched only a couple of times in their history.

For SPY, we saw similar streaks in late June 2000 and 2005, both of which ended quickly after hitting 24 days. After the 2000 occurrence, the S&P spurted higher over the next couple of weeks, then gave it all back over the next couple. It was basically at the same price three months later.

In 2005, the S&P also jumped higher in the short-term, chopped around then gave all the gains back - and again the index was essentially unchanged a few months later.

For QQQQ, there was only one instance which lasted this long, which was 06/30/04. That was a very bad time to be a buyer, as the index went into a 15% tailspin over the next month and a half.

There were two other times that reached 22 straight days of below-average volume, which were 7/5/00 and 1/3/08. In 2000, the index shot higher for a week, then gave it all back and was essentially unchanged after a few months.

In January 2008, well, we know what happened - we got the severe sell-off into March.

I often hear about this being a nice "low volume consolidation" after the March bottom, which is a textbook bullish pattern. I often take issue with the textbooks, though, since they're based on theory, what "should" be, and a few hand-picked examples instead of the evidence of what is. And low volume is not a bullish thing, as we've discussed a couple of different ways this week. It may not mean the end of the rally, but it's a sign I'd rather not see.

I mentioned a couple of additional minor potential negatives this morning, namely increasingly-enthusiastic Rydex mutual fund traders and an overbought STEM.MR Model on the Nasdaq 100. The NDX did take a rather nasty spill earlier today, but along with the other indices it has climbed back over the past couple of hours.

The S&P is right back up to that 1400ish area that so many are watching, and it's certainly the level that most short-term traders are using as a pivot. I think because of that there's a danger of seeing a "fakeout breakout" that helps to wash out buy-stop orders resting above 1405ish, but that's just speculation on my part. More encouraging is the attempted breakout in the Russell 2000, which is slightly over the 720 area and threatening its highs of the past few months. That and the S&P are the only two major indices not trading at multi-month highs.

With the overbought conditions I mentioned this morning no longer as relevant after the morning decline, I'm not tempted to do much here. I don't see a very strong edge either way, and that 1400ish area should serve to create some "interesting" trading in the short-term. About the only way I'd take a long position is if we see a blast over 1400 that settles back and holds. For shorts, I want to see either a gap above 1400 that falls back below, or just a general failure around this level. Either way, I'm likely going to have to wait until next week for a setup.

A Couple More Minor Concerning Signs

04/25/08 10:00 AM EST

As of:

SPX 1375

HELP ARCHIVE

Good Friday morning...We begin the day with mixed performance in the major equity indices and the broader sectors. We have an odd mix among the sectors, with Brokers, Oil and Retail leading, while Tech and Housing are trailing. That's an unusual pattern and is not the kind of thing we've seen on big up or down days.

Over the past few days, we've gone over a couple of minor signs that optimism (or lack of concern, anyway) is picking up. The extremely low volume we've been subject to is a cause for concern in a down-trending market as we went over on Monday, and the latest survey from AAII showed the lowest number of pessimists since last fall.

On a shorter-term basis, we haven't see too much optimism despite the overall positive drift in stocks this week. That started to change a bit yesterday, as the STEM.MR Model for the Nasdaq 100 went into overbought territory.

I checked the past five years of history for that model to see what's happened when the model was as stretched as it is now, and the Nasdaq 100 gapped up at least 0.5% at the open. Buying the open and holding for the day resulted in mixed performance, but the longer out we looked, the worse it got. Holding for a week resulted in six losing trades out of six attempts dating back to December 2003. The average return over the next week was -2.7%, with an average maximum gain during the next five sessions of only +0.8% compared to an average maximum downside of -3.8%.

That's one possible caution sign, and another comes from traders in the Rydex family of mutual funds. As of yesterday, those folks were almost four times more likely to invest in a "risky" fund as opposed to a "safe" fund as determined by the Rydex Beta Chase Index, the most speculative attitude we've seen in a couple of weeks.

That isn't quite into what I would consider truly extreme territory - I'd prefer to see it up in the 5 to 10 times range, but it's at least notable that the few other times these traders got this enthusiastic for risk since the October high, they've gotten beaten back over the next week or so.

As we went over multiple times during the past couple of weeks, there were very few trouble signs popping up as the market was doing well in following through with the studies we went over in March. Now that many of those targets have been reached, we're starting to see some initial signs of the "too far, too fast" phenomenon.

The signs we've gone over during the past few days (low volume, low AAII bearish percentage, overbought STEM.MR model and high Beta Chase Index) are relatively minor as far as I'm concerned, but they're enough to make me raise my eyebrows and trim my expectations somewhat.

On a short-term basis, I'll have no intention of actually betting against a rally if the S&P 500 can break out over that 1400 - 1405 area that so many traders have on their radar as huge resistance. If we break out over that, then settle back over a couple of days and hold over it, it could set up another buying opportunity, but right now I don't want to risk capital that that's going to happen.

If anything, given what we went over above, a higher-probability trade would probably be a bet against a breakout, using that resistance level as a stop. That level is SO obvious that it's a bit worrisome (we could see traders push prices above there to set off buy stop orders, triggering a false breakout), but that's hard to game. For now, I'm really not doing much of anything trading-wise, but if we see the indices start to roll over and not able to set new intraday highs, then I'll consider a small short position as long as we're under that potential resistance of 1400ish on the S&P.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.