Snapshot Notes - June 5, 2008


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THURSDAY, JUNE 5, 2008

Jobs Report Reversal?

06/05/08 1:45 PM EST

As of:

SPX 1386

HELP ARCHIVE

With an oversold bounce in financials and oil stocks, and tech and small caps continuing to look extremely strong, the broader market is enjoying its largest intraday gain since May 1st. We'll have to see if that holds up as we await tomorrow morning's jobs report.

The last time the S&P 500 closed up at least 1.5% the day before a jobs report was just last month when the S&P had a 2% day leading up to the report. The next morning it gapped up +0.9% on the open but sold off to close near unchanged on the day. We also saw this in February, but while the S&P gapped up +0.4% on Friday morning, it managed to tack on about another 1% during the day before reversing in the days following.

Over the past decade, the performance was more mixed. When the S&P was up 1.5% or more on the day before the jobs report, it gapped up on Friday morning 7 out of 11 times with an overall average of +0.3%. When it gapped down on Friday morning, though, it tended to be a better buying opportunity, as the index closed higher than the open 3 of the 4 times with an average of +0.4%.

If the S&P gapped up on Friday morning, then it closed higher than the open 4 of the 7 times, with an average return of a modest 0.3%. Most importantly, though, if you bought at Friday's closed and held until Monday's close, you would have had 7 losing trades out of the 7 occurrences, averaging -0.5%. The average maximum gain was only +0.3% compared to an average maximum loss of -0.9%. Three days later, you would have still been sitting on 7 losers, averaging -1.6%.

This goes to the heart of something we discuss frequently - enthusiastic reactions surrounding economic events tend to be good contrary signals. Very, very often we see extreme moves based off of - or occurring immediately before - economic news and events getting reversed in the days following.

So far today we've gotten all the classic signs of a trend day. Breadth is very strong, most sectors are participating, buying pressure has come in every time the NYSE TICK approaches zero, and it's taking us to new intraday highs. These days typically close at or near the day's high, and it's unusual to see a meaningful reversal going into the afternoon when these conditions have persisted so late in the day.

We've seen this happen six times so far this year, and the S&P managed to tack on even more gains into the close four times, averaging nearly 1%. The losers were on March 24th and April 18th when the S&P lost around 0.6% both times heading into the close.

Given the trend-day qualities, it seems likely that the indices will hold up into the close, but as always I'll be watching for any change in the conditions mentioned above that violate the usual trend-day qualities. The reaction tomorrow morning is a toss-up based on the jobs report, and I have no edge there.

It seems we've probably seen the bulk of the gains for this short-term move, and I would be surprised to see more than another +1% through tomorrow's open, especially as we're starting to get some overbought cautions from our more sensitive indicators (namely the Price Oscillators, which have given us several good heads-up lately). If we do hold up today and gap up tomorrow, based on the probabilities we went over above, it doesn't seem likely that those additional gains would hold up. There has been a very consistent tendency to see those setups get reversed early the next week, and it may even provide us with an opportunity for a short-term short setup tomorrow.

All Eyes on the Banks

06/05/08 9:25 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Thursday morning...We begin the day with a modest bounce in the pre-market futures as the morning economic data was in line to slightly better than forecast. Rapt attention will be paid to tomorrow morning's jobs report. Foreign markets were mixed, as were commodities.

One of the notable aspects about yesterday's trading was that some of the sectors that are believed to be "leading" sectors, like technology, small caps and transportation, all closed up more than +0.5%, while the broader indices like the S&P 500 and DJIA closed in negative territory.

Looking back over nearly 20 years, there were 39 other days that met those criteria. Looking at the Dow, it showed a very slight bullish edge in the short-term, being up three trading days later 62% of the time with an average of +0.2%. The S&P was about the same, though the average return bumped up to +0.7%. Looking out any longer than a few days left the impression of no edge whatsoever, with the results being perfectly in line with random.

When this kind of sector divergence occurred after the S&P had already declined for a couple of days, it narrowed down the sample to to only two occasions. Not that we can read much at all into them, but for the record they were 10/7/92 and 3/2/99. Both happened to mark the end of a correction within a day, with major gains (3%+) seen over the next few weeks.

This morning we're seeing the indices gap up around +0.25% after three straight down days in the S&P. That hasn't been a great signal for the day's trading, with the S&P showing a gain from the open to the close about 48% of the time, and an average return of -0.1%. There were three occurrences since March, all of which led to further gains during the day, but there were three in January that all led to losses. The returns got better the further out you looked, due to the market's tendency to recover from multiple down days.

Like always, if I'm looking for a short-term rally then I'd rather see the indices gap down than up. If the S&P was gapping down -0.25% instead of up, then the expectation on the day would be a return of +0.5% with a 63% probability of being positive. By three days later, that would grow to a +1.2% return and 70% probability.

Yesterday, we went over some stats related to what has happened in the past when the BKX Banking Index suffered four straight 1% daily losses. The results were exceptionally bullish, with only two of ten occurrences suffering a loss of any significance the next day. Essentially all of them marked spots where the index bounced - hard.

With financials the largest lag on the indices, if tech can stay strong and we get the banks to follow through on their potential to bounce, then without question it would lead to a decent bounce in the broader indices. My focus today is squarely on the banks as we see if they can get in gear. If so, I'll be looking to press on the long side in the S&P and/or DJIA.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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