Snapshot Notes - June 4, 2008


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WEDNESDAY, JUNE 4, 2008

Banks Are So Bad They May Be Good

06/04/08 3:00 PM EST

As of:

SPX 1386

HELP ARCHIVE

The wreckage in financials continues today, with an early-morning rebound petering out and leading to another round of new lows.

In the process, the BKX Banking Index is suffering yet another 1% decline on the day, its fourth in a row. Going back to 1993, there have been 10 other such instances (two days overlapped, meaning there were 8 distinct occurrences).

The table below highlights each of the other instances, with the BKX's go-forward performance after each one.

We can see from the table that there was a very clear bullish bias. The last two instances marked bear-market bottoms, and while two of them led to next-day losses of more than 1%, by two weeks later essentially all of them showed a recovery (the one loss was a nominal -0.2%). With an average return by two weeks later of +5.9%, and 9 out of 10 showing a positive return, that's something to note.

Since financials, and banks in particular, have been a substantial drag on the indices, a recovery in that sector would do wonders for indexes like the S&P 500, especially if technology continued to hold as well as it has been.

I'm not the type to try to bottom-fish the end of a bear market (well, sometimes I am...but we need to see historical levels of panic, which we're not seeing now), but a rebound in banks should lead to a sympathy effect in other sectors.

I'm not ready to buy just yet, but I'm started to get interested. Not in banks specifically but at least in the general market, and more probably in some of the sectors that have been showing relative strength. As I've been mentioning in past comments, I have some serious concerns about the technical structure of the market at this point, and today's inability so far of the S&P 500 to hold above last week's lows (around 1375ish) isn't helping matters one bit.

This makes for a difficult juncture. The S&P and DJIA are clearly broken and in confirmed downtrends the way I look at things. That instantly makes me hesitant to buy, and instead I prefer to look for setups like last week in order to sell short. We're really not even seeing that many sentiment extremes at the moment - even our most sensitive indicators are still neutral. But the BKX study above is very intriguing to me, and I will be watching that sector - almost to the exclusion of all else - in the coming days to see if they can muster a bounce. If it looks like they're starting to stabilize, then I'm going to look at wading into some long index positions.

Hanging By a Thread

06/04/08 9:25 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Wednesday morning...We begin the day with a slight drop in the pre-market futures as yet more concerns over the financial sector take their toll on foreign markets and investor confidence. Many have been wondering when the second shoe was going to drop after the March recovery, and it looks like it's on its way down now.

One of the signs bulls were pointing to last week was the dramatic dip in confidence among newsletter writers, according to the Investor's Intelligence sentiment survey. The Bull Ratio (Bulls / (Bulls + Bears)) for that survey had dropped 6% last week, the largest one-week decline since March, and put the indicator into "excessive pessimism" territory.

The market's recovery last week prodded a few of these guys back into the market, though, and we're seeing a fairly large shift back to the bullish camp this week, with the Bull Ratio gaining almost 5%, enough to push it back into neutral territory.

This is the first time in five years we've seen such a large back-to-back swing in bullishness, with a drop of at least 5% in the Bull Ratio one week, then a rebound of nearly 5% the next. In fact, it's only happened twice in about 10 years - late April 2003 and early May 1997. Both happened to be good times to go along with the renewed bullish opinion, as over the next two months the S&P tacked on about 11% in both cases.

Going back further didn't support that bullish case so much. The data series was much more volatile prior to the last 20 years or so, so most of the precedents we have for this kind of week-to-week change is from the mid-1970's. Overall, the returns from the next week through six months in the future were mixed, and in line with random.

Late last week, we went over several negatives to end the week. Those have certainly taken force to begin the new month, and it's leaving a couple of the major indices (S&P 500 and DJIA) in a precarious technical position. The S&P is hanging (barely) to its lows from last week, and a violation and hold below there will put in place a clear pattern of lower highs and lower lows, in addition to the other intermediate-term negatives we'd been going over since late April / early May.

On a more positive note, our more sensitive guides are close to oversold, but not quite there. Price-wise, we have a modestly bullish pattern setting up here, with the S&P losing 1% on Monday, then at least 0.5% yesterday and now gapping down at least 0.25% today. The last few times that occurred were all good short-term buying opportunities (8/16/07, 1/22/08 and 3/3/08), and since 1993 it has resulted in a positive return in the S&P over the next two days 67% of the time, averaging +1.6%.

I'm not particularly enamored with trying to buy, even for a short-term flip, in a market that's being dominated by financial-market rumors (we saw how dangerous that was this spring), but if the S&P can recover from the gap down this morning and hang on above last month's lows (around 1375 on the S&P), all is not lost just yet. I'm still not optimistic that the lows from last week are going to hold on a more intermediate-term time frame, though.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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