Snapshot Notes - May 21, 2008


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WEDNESDAY, MAY 21, 2008

Support Isn't Holding as Traders Digest Fed Minutes

05/21/08 2:55 PM EST

As of:

SPX 1375

HELP ARCHIVE

Stocks are getting socked after the release of the Fed minutes, which seems to have contained some language traders are finding repulsive.

Oddly, the selling pressure isn't being felt too much in our intraday guides, which are mostly still in neutral territory. I was hoping to see them dip into oversold while the indices held support, but we have neither at the moment.

Breadth on the NYSE is lagging, with about 1300 more stocks down on the day than up. When breadth has been this bad this late into the day over the past decade, the S&P 500 has gone on to lose even more into the close about 60% of the time, though the average decline was only about -0.1% on average. Not too big of an edge there.

I mentioned some stats regarding seasonality around Memorial Day earlier this morning, and I wanted to touch on that again. Since 1950, if the S&P 500 got as oversold as it is now (as defined by a 3-day Relative Strength Index), two days before Memorial Day, then it paid to buy and hold through the first few sessions of June. There were 11 winning trades out of 14 occurrences, with an average return of +1.3%.

As I mentioned this morning, though, the day following Memorial Day has tended to be fairly weak, and waiting to buy until that was out of the way improved the results, especially in terms of drawdown. There were a couple of very nasty declines heading into Memorial Day (in 1962 and 1970) that would have caused a good amount of extra holiday stress. Waiting to buy until the day after the holiday would have mitigated those declines greatly.

Again, I don't want to stress seasonality too heavily - it's just a tertiary factor as far as I'm concerned. Stocks do tend to exhibit more consistent seasonal behavior around holidays than around most other periods, so that's why I'm mentioning it now. If we have other factors lining up for a long trade, then this bias will help determine if I want to take the trade, and more importantly how I want to size it.

With the S&P 500 dropping below 1400, we have one level of potential support out of the way, and the index didn't really even stop to pause there. That's definitely a yellow flag, and it makes me not want to be too quick to try to jump in here, especially after the series of negatives we'd discussed over the past week(s).

I do think we'll get a decent shot at a long-side trade in the coming days, I'm just not sure it's going to happen before the holiday. If the S&P drops to 1380ish into tomorrow morning, and we get some additional signs of excessive selling pressure or too much pessimism, then I'll look to establish some longs for a quick trade. Other than that, I'll look for an entry mid-week next week as we head into the month-end period that has been so strong.

Taking a Peak at Holiday Seasonality

05/21/08 9:45 AM EST

As of:

SPX 1375

HELP ARCHIVE

Good Wednesday morning...We begin the day with some modest strength in the major indices, particularly tech and small-caps, which helped to lead the afternoon rebound yesterday. Oil is up again, but its "evil twin", gold, is flat.

On Friday, we went over a study that showed how the broader market had a tendency to get dragged down by Financials when that sector has been lagging badly. Yesterday didn't seem to improve matters much, as the BKX Banking Index got hit hard yet again. That index is now within 5% of its low.

I checked for any time since 1993 that that index was within 5% of a two-year low, while the S&P 500 was more than 10% above its 52-week low. There were only two occurrences that popped up - October 4, 2005 and October 24, 2007.

After the former, the S&P went on to lose -3.0% over the next two weeks, while after the latter it lost -2.7%. It's hard to read much of anything into just two occurrences, but it highlights the fact that we're in a very unusual situation with the broader market holding up in spite of the giant sucking sound that is the banking sector.

The only possible positive here is that banks have fallen so far, so fast that they're likely to snap back. Anytime the BKX Index has lost 8% or more within a 10-day window, it has shown a positive return over the next week 65% of the time with an average of +2.2%. If banks can stage at least a short-term rebound, it should no doubt translate to a snapback in the broader equity indices as well.

Seasonality isn't too much of a force here, but heading into and after the Memorial Day holiday, it may help to influence trading just a bit. Trading surrounding the holiday has exhibited the same pattern as other holidays - strength on the day immediately before the holiday (the S&P was up about 60% of the time) and weakness immediately after (the S&P was up less than 40% of the time), as you can see from the chart on the site.

Going into the end of the month, there is a brief spurt of positive days. If we buy the S&P the day after Memorial Day and hold for a week, then over the past decade that has resulted in 9 winning trades out of the 10 attempts, with an average return of +1.0%. The average maximum risk of -1.0% was half as much as the average max reward of +2.0%.

As always, seasonality to me is nothing more than a gentle breeze either for or against us, and very rarely a reason for a trade in and of itself. Taking that into account, I'll be a bit more inclined to look for longs going into the end of this week, out by the weekend, then look more aggressively for long trades going into the end of the month.

Our short-term guides are flirting with oversold territory, so the setup I'll be looking for over the next day or two is a little more weakness that pushes us into oversold territory. If we get that, it would coincide with a little bit of positive seasonality before the holiday, and likely the indices holding above probable support levels (namely 1400ish on the S&P). That might be worth a shot on the long side for a short-term trade. If we don't get that, I may look for a better chance to sell short heading into the weekend, banking on the negative post-holiday seasonality, preferably if that occurred with some overbought readings and the indices hanging under resistance.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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