Snapshot Notes - June 3, 2008


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TUESDAY, JUNE 3, 2008

Rumors Threaten Another Broker

06/03/08 2:40 PM EST

As of:

SPX 1386

HELP ARCHIVE

Late last week, we discussed the fact that the market was ending the week with a day that had low volume, with a narrow range, after several days of already rallying.

All of those factors taken separately tend to lead to sub-par returns, and combined altogether it looked like a bad recipe for those leaning on the long side. The past two days have alleviated those negatives, but created more in terms of the technical damage - the S&P 500 and DJIA are now trading below last week's lows on the heels of bad news from the auto makers and even worse rumors about Lehman Brothers. That broker is getting hit hard on the same type of talk that downed Bear Stearns.

In the process, the S&P is threatening to put in back-to-back losses of 1% or more to start a new month for the first time since August 2002. Looking back over the history of the index, there were a total of 9 months that also suffered that kind of wicked greeting of a new month, and it didn't lead to anything consistent in the short-term. Somewhat surprisingly, however, buying after a few days went by and holding until the end of the month led to positive returns 7 out of the 9 times, with an average of +2.3%.

Ignoring the monthly phenomenon, this would be only the third time since the October high that the S&P put in back-to-back 1% losses. The other two instances (December 17th and February 5th) led to short-term rebounds before further selling pressure kicked in. Generally, buying into the S&P after consecutive 1% losses during a downtrending market led to very modest positive results going forward, but they were not far enough away from random to consider it to be an edge either way.

The selling pressure has been pretty heavy for most of the day, with the NYSE TICK rarely moving over that zero line. It's been enough to push our Cumulative TICK down to -2200 for only the second time since the March low. In March it got down to -5000 or worse, so certainly there's room for it to move to an even further extreme, but during normal market conditions this is enough to consider it oversold.

There's going to be quite a battle looming here soon between short-term oversold readings and technical breaks in the averages, namely the S&P. If that index can regain its lows from last week (around 1375), then we may stave off that technical break, but it's a level a lot of folks are watching carefully. That, and the action in LEH, are the main objects of my attention at the moment.

Reflex Rally

06/03/08 10:25 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Tuesday morning...We begin the day with some moderate follow-through to yesterday afternoon's late recovery, with most of this morning's gain coming after a surprisingly strong report on factory orders. We continue to see the same theme we've seen for the past couple of weeks, with banks weak and technology holding strong. That's leaving the broader indices torn and without much of a directional bias.

I can't find much that's new to go over this morning. Yesterday we looked at what's happened in the past when a new month starts off with such a poor performance, and also when happens when the VIX goes from a one-week low to a one-month high in just one day.

The VIX study led to positive short-term results in the S&P 500 a high percentage of the time (just over 70%), and when we combine that with relatively positive beginning-of-month seasonality and the tendency for averages like the S&P to snap back from large one-day declines, it seemed to make sense to expect a rebound attempt after yesterday's drop.

But the concerns we've been going over lately haven't changed. We remain in a longer-term downtrend, with an intermediate-term uptrend that was broken the week before last, after seeing multiple signs of too much optimism at the end of April and beginning of May.

We also have some relatively poor seasonality in the coming months. A couple of weeks ago, I wrote about the Seasonality Index and how we're entering a period of almost all "0" days for the first time since the summer of 2006. Returns during those periods have been sub-par, and we're going to be dealing with that through the fall.

I don't want to harp too much on seasonality, as it's just not that big of a factor to me, but let's just take a quick look at June. If we buy the S&P 500 after the third trading day in June and hold it for two weeks (meaning we're long the S&P during the meat of the month), then since 1950 we would have had a successful trade 44% of the time.

If we stipulate that the index was in a downtrend at the time (a downward-sloping 200-day moving average) then we would have had 38% winning trades (6 out of 16), with an average return of -1.3%. The average maximum loss during the two weeks was -2.9% compared to an average maximum gain of +1.8%. Only 1 instance out of the 16 showed a two-week return greater than +1%, while 7 of them showed a loss of more than -1%.

For the short-term, a few of our more sensitive indicators dipped into oversold territory by yesterday afternoon, and combined with the other factors above I'm allowing some room for a reflex rally over the next day or two. But after that, the other negatives should take hold again and I'll be watching last week's high and low carefully. I suspect that the lows will end up giving way, and that would help to reinforce the idea that we're in for a tough stretch ahead.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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