Snapshot Notes - June 6, 2008


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FRIDAY, JUNE 6, 2008

Big Reversal Not Necessarily A Death Knell

06/06/08 2:50 PM EST

As of:

SPX 1386

HELP ARCHIVE

One of the more-requested studies I've been asked for today is what has happened previously when we've seen the kind of up-down reversal like the past two days, especially in the context of a bear market.

So let's look:

The most consistent performances were three days and one month later, both of which had fairly positive tendencies. The largest short-term drop in October 2002 transformed into one of the larger longer-term gains. The only real failure looking out a month was in 1974, which was a time period we looked at quite a bit in January and March.

The banking sector is getting hit particularly hard again, and coming on the heels of the study from Wednesday, it looks to be capitulatory - particularly if we get a huge spike in volume in the BKX Banking Index. This time is obviously not exactly comparable to any other time in history, but even going back to 1989, the sector has formed some kind of a bottom within mere days of the kind of performance it has put in during the past week. Like I said earlier this week, I have little to no interest in bottom-fishing in the sector, but I do think a sustained bounce (which is seeming more and more likely) will propel the broader indices.

The move in Oil has been exceptional, with a 5% gain each of the past two days. The only other times I could find in the past 25 years where this has occurred as Oil was hitting at least a one-year high were 4/20/89 (a North Sea oil field was shut down) and 8/3/90 (Iraqi invasion). In the latter case Oil pushed higher for one more day, but in both cases the commodity was near a short-term peak, with a pullback of 10% - 15% over the next few sessions. Also notable is that both were triggered by fundamental crises, and not a weaker dollar or (even more ridiculously) a brokerage-firm upgrade, the two reasons being given today for the recent spike. It looks to me like there's something more ominous brewing under the hood, and if so it should show itself this weekend.

Technically, things are not looking good. The S&P and DJIA are showing a clear pattern of lower highs and lower lows, in the context of a down-trending market (a downward-sloping 200-day moving average) and broken uptrend line from two weeks ago. We're seeing a small smattering of oversold signals among our more sensitive indicators, but given that technical context it isn't enough to get me excited about the long side yet.

This all makes for a pretty muddled picture. Just based on the technical shape of the S&P and DJIA, I would rather short than look for longs, but the positive relative strength of the NDX and Russell 2000 are positives that tend to help the broader market. We're also seeing breakdowns in a number of sectors (e.g. banks), but they've been hit so hard that we're starting to see signs of capitulation.

In this environment, I've been taking very quick trades when I think we have a good setup, but they've been very short-term and I don't see that changing soon. At the moment, I don't see a good edge either way, but as we get more time to digest some data over the weekend, that may change by Monday. I think we may actually get a decent chance for a long-side bounce if we close poorly today and get another day or two of downside early next week, but we'll cross that bridge if we come to it.

Biggest Employment Surprise in a Decade

06/06/08 9:15 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Friday morning...We begin the day with some selling pressure in the pre-market futures, as our enthusiasm yesterday didn't quite spill over into foreign markets, and this morning's jobs report contained what looks like a nasty little surprise in the form of the unemployment rate.

Yesterday, we went over some stats related to how the market has typically performed when staging a big up day prior to the jobs report. Like most reactions to economic events, if the market gapped up on the morning of the report, then it was typically an excellent time to look for the market to back off over the following days.

We don't have to worry about that this morning, as the higher-than-expected unemployment rate triggered the gap down that we're currently facing. For what it's worth, there were three other times the S&P 500 gained at least 1.5% the day before the jobs report, then gapped down at least -0.5% on the morning of the release. It closed the day higher than the open 2 of the 3 times, but I couldn't see anything consistent about the go-forward performance. For those curious, the dates were 10/1/99, 4/6/01 and 1/10/03.

According to Bloomberg data, this is the biggest miss between the actual and economists' estimated unemployment rate since at least 1997. The next-largest miss was the August 2001 report, which printed 4.9% versus a median estimate of 4.6%.

The market did not have a good reaction to that report, with the S&P gapping down about -0.6% and closing the day down -1.9%. With such an unprecedented surprise today, and the recent focus on economic data given Fed Chairman Bernanke's comments and interest rate posturing, this has to be considered a concern. There may be some wrinkle in the data that gets discovered once traders have a chance to delve into the report, but the headline number is not good.

I mentioned yesterday afternoon that while we were seeing trend-day qualities that should see us close at or near the day's highs, I didn't expect much more upside. That was due to the simple fact that we'd already seen solid gains, plus our more sensitive indicators were approaching overbought and the broader indices had some possible resistance just ahead. Also, if we gapped up this morning, then it should be a better sell setup than anything. The gap down obviously throws a wrench into any short-selling plans, as gaps are emotional traps that reverse more often than not. But if we see new intraday lows after the first hour of trading, then my assumption will be that the selling pressure will continue enough to at least work off the overbought conditions from yesterday.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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