Snapshot Notes - May 2, 2008


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FRIDAY, MAY 2, 2008

A Market In Flux

05/02/08 3:20 PM EST

As of:

SPX 1375

HELP ARCHIVE

The indices have spent the day working off the opening enthusiasm, as a few credit issues have popped up again, and oil has worked steadily higher.

We were already modestly overbought on some short-term gauges heading into today, more so on a few others like the Price Oscillator that we discussed this morning. A large gap up opening, during a long-term downtrend, with at least modest overbought conditions, and based off an economic report, usually has a poor chance of sustaining the pre-market enthusiasm and we're seeing more evidence of that today.

I've spent a good deal of time going over various price-based scenarios based on today's reversal (so far) from the opening gap at a multi-month high. Like I've run into repeatedly over the past two weeks, though, the stats weren't all that consistent either way. The reversal will look ugly on a chart, but historically it's tough to find anything particularly negative about it. In fact, our short-term model for the Nasdaq 100 is already flirting with oversold territory, so further weakness is certainly not a given.

We've gone over a handful of what I would consider minor negatives over the past week, such as a surge in optimism among Rydex traders and individual investors in the AAII survey, along with exceptionally low volume among stocks and ETFs. All of them pointed to the likelihood of prices stalling out for a bit.

Given those developments, the general downtrend we're in, and potential resistance areas just above, I've been trading very light when I make a move at all. Compounding the situation, we had some confusing moves among assets classes yesterday which calls into question some of the correlations we've been able to count on over the past six months. Perhaps that in itself is a healthy sign that conditions are changing and becoming more favorable towards stocks, but I'm not quite ready fully embrace that.

The market has already met most of the projections from the studies we went over in March, so I've become quite sensitive to signs of "too much, too fast" in terms of price gains or "dumb money" optimism. We've spotted a few of those lately, which has been enough to make me more cautious in chasing long setups, and more willing to tread on the short side when opportunities arise. It's finding those opportunities - on either the long or short side - that's been tough. I'm still not seeing a solid edge for the short-term and increasingly the intermediate-term.

I continue to feel that there are some unresolved minor negatives that we have to struggle with here, and will keep a neutral to very slightly negative bias until the indices can overtake some resistance levels. The S&P 500 is doing a good job above 1400ish, which is a point in the bulls' favor, but we should also see the Nasdaq 100 overtake 2000 and the Russell 2000 hold over 740ish to help confirm the breakout. I will not chase prices higher in this environment, but if we do see additional strength, then some consolidation above the former resistance levels, I'll look to wade in again on the long side. Until then, I'm staying mostly on the sidelines.

Another Gap on Economic Data

05/02/08 9:20 AM EST

As of:

SPX 1375

HELP ARCHIVE

Good Friday morning...We begin the day with a large gap up in the major indices, as the initial knee-jerk reaction to the payroll report was strongly positive. We've faded a bit since the immediate spike, but for the most part the pre-market futures are holding their gains.

If we look at any time the S&P 500 gapped up +0.75% or more on the morning of a payroll report, then we see that it closed higher than the open 45% of the time by an average of +0.2% (each of the last five were losers). Like most extreme reactions to economic releases, this one tended to back off after the initial excitement. Holding for three days would have generated losses 64% of the time, averaging about -0.3%.

I could find only three other times when it gapped up this much on the heels of a 1% or larger gain the day before (7/3/97, 3/5/99 and 6/2/00). Two of those led to immediate losses lasting a few days, while the middle instance chopped higher for a couple of weeks before giving all the gains back.

Our shortest-term guides are mostly neutral despite yesterday's trend day, though a couple are sitting in extreme territory. Because of the persistent trend during the day yesterday, the Price Oscillator for both the S&P 500 and Nasdaq 100 are very stretched, well into overbought territory. I checked for any other time the Oscillator for the S&P was above 65% and then the S&P's tracking fund (SPY) gapped up at least +0.5% the next morning.

This was very rare, going back to 2003. I could only find three other instances (9/19/07, 11/14/07 and 3/24/08), all of which held up initially, then gave back all the gains. Over the next week, all three showed losses averaging -2.4% with an average maximum loss that was more than three times the average maximum gain.

We're still mired in a long-term downtrend in the major indices (though the Nasdaq 100 is close to turning the corner), so when we get these kinds of overbought runs into what could prove to be another round of resistance, I have no desire to chase prices higher. Shorting is about the only possibility for me here, but I'm not going to be doing that on the open. I want to see how traders react first - if we can go on to make higher intraday highs after the first hour of trading, then I will abandon any plans to sell short until nearer the close. If the NDX can make it over 2000 and hold, and the Russell 2000 over 740, then I will have no choice back to back off the idea that this breakout attempt will most likely fail in the short-term.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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