Snapshot Notes - June 10, 2008


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TUESDAY, JUNE 10, 2008

Breadth Is Mysteriously Weak

06/10/08 3:25 PM EST

As of:

SPX 1386

HELP ARCHIVE

Last month, I mentioned how a few formerly-reliable correlations that had been firmly in place for months were beginning to break down.

We were starting to see stocks responding less (or even opposite) to how they had behaved previously when there were big moves in other markets, particularly bonds (longer-dated Treasuries) and currencies (the Euro/Yen and Dollar/Yen). We're seeing that again today, as long-term Bonds are getting hit, and the Dollar/Yen is breaking to multi-month highs, but stocks are not lifting strongly like they had in the past with that kind of combination.

And the indices are actually a lot stronger than most stocks. Right now I'm showing that the Up Issues Ratio on the NYSE is at 35%, meaning that of all stocks moving up or down on the day, only 35% of them are moving up. We normally see the S&P 500 down 1% or so with breadth like that.

Part of the reason is the sell-off in bonds, which influence a large number of securities on the NYSE. But even if we use common stocks only, the Up Issues Ratio is still barely above 40% so far today.

It isn't just today - we saw basically the same thing yesterday. I checked the past 45 years for any other time the S&P 500 was positive two days in a row (it's slightly negative today, but could turn positive on a moment's notice), but the NYSE Up Issues Ratio was 35% or less both days.

It has never happened before.

In order to find any precedents, we have to relax the parameters a bit. If we move the Up Issues Ratio threshold to 40% or less, then there was only one previous instance (July 27, 1998). That wasn't a great time for the market, as the S&P sunk about 6% over the next couple of weeks.

Again, we can't read much of anything into one occurrence, so let's relax the parameters yet again and look for an Up Issues Ratio under 45%. Then we get 6 occurrences, still too small to conclusively determine anything but better than we had before.

Here, the S&P showed mixed to negative short-term results, with a three-day return that was positive 2 of the 6 times and averaged -0.3%. There were three instances in the past decade, and they were all short-term negative (averaging about -1% over the next three days). After that, the returns were mixed and I couldn't decipher anything consistent among them. For those curious, the dates were 7/31/72, 12/9/75, 7/29/77, 7/27/98, 2/23/00 and 10/5/00.

For the past couple of days, I've been struggling to find any solid edge on either side of the coin, and that seems to be a familiar refrain among other traders. The intraday moves in the indices have been "spiky" and fleeting, with no real trend. Sector trading has been just as difficult, with the leaders and laggards trading positions seemingly every day.

In this kind of environment, I prefer to hunker down and not do much, which is what I've been doing. It's tempting to take a flier on the Nasdaq 100 or DJIA based on possible support levels just underneath, but within an overall down-trending market and broken intermediate-term up-trend lines, that's a dicey strategy. My gut is telling me to find some kind of excuse to go long either one somewhere around here, but I'm not a gut-based trader and objectively I cannot find good reason for risking capital on the long or short side for a trade.

Ripple Effect Socking Stocks

06/10/08 9:25 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Tuesday morning...We begin the day with a large gap down in the pre-market futures. The indices are off their lows of the morning, but each of the majors are indicated to open between 0.75% and 1% below yesterday's closes.

Anyone not watching various markets after U.S. trading closed yesterday is likely waking up to a nasty surprise this morning. Between China upping its banking reserve requirement (sending that market down 8%), and Bernanke sounding the alarm on inflation (sending short-term Treasury notes tumbling), it was enough to knock the U.S. futures for a loop.

The move in short-term T-Notes is exceptional, one of the largest moves in 30 years. That has helped to flatten the yield curve dramatically over the past two days. Using data since 1977, the current two-day drop in the spread between 2-Year TNotes and 10-Year TNotes is the largest since 1982. Not only that, it's five standard deviations from the norm over the past 30 years.

That may not seem applicable to our domestic stock markets, but everything is interconnected nowadays. There are many - many - traders who bet specifically on the yield curve, and they typically use heavy leverage in doing so because the average daily move is quite small. So when we get a five-standard deviation event, that means trouble.

We've seen these kinds of moves several times since February 2007, and every time one or more large hedge funds have blown up because of it. These surprises usually cause ripples through other markets, and I believe it's part of why we're seeing a 1% gap down open this morning.

I mentioned yesterday that after the big down day on Friday, we should have had several slam-dunk buy signals. Oddly, though, I couldn't find much of anything. We did have a couple of indicators, like the Price Oscillator and VIX, that were suggesting an immediate drop-off in volatility and bounce in the indices, but they were short-term only and not all that enticing. It was surprising to not find many setups after a 3% down day to end last week.

Yesterday didn't help matters much. The intraday reversal helped stave off another big down day, but again there wasn't much about yesterday's trading that suggested we should see an imminent bounce. The market has had a marked tendency to rebound during the middle of the week (Tuesday, Wednesday) when there has been a short-term downtrend in place, but that kind of seasonal setup is best used only as support for higher-probability setups based on sentiment, breadth or price patterns. And it's within those kinds of patterns that I'm having trouble finding any solid edge.

We do have the "Turnaround Tuesday" effect here, and the market tends to rebound from large gap down openings, but our more sensitive guides have alleviated their oversold conditions with yesterday's session, and looking at today's open from several different angles didn't show me any setups good enough to present to you. I can't find much of anything that suggests buying (or shorting) today's open is a high-probability affair, so I'm not going to be doing anything trading-wise until something better comes along.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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