Snapshot Notes - June 13, 2008


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FRIDAY, JUNE 13, 2008

Banks Continue To Look As Bad As Ever

06/13/08 3:15 PM EST

As of:

SPX 1386

HELP ARCHIVE

The indices have held up fairly well so far today, after coming down to test their lows after the morning gap.

One sector not making the trip is Banks, which is getting hit yet again today. We've discussed this a couple of times previously, but generally when the broader market holds up in spite of a poor performance in the Banks, it usually doesn't last.

Using the S&P GICS Bank Index (which tracks the more widely-known BKX Index very closely, but has about four years of additional history), I looked for any time that index was down on the same day the S&P 500 was up 1% or more.

Out of 17 occurrences dating back to 1989, the S&P was positive over the next week 47% of the time and showed a negative average return. That's not as bad as it looked earlier in the day, when Banks were down more than 1%. Previous instances with a 1% or greater loss in the banking sector while the S&P was still positive led to forward returns that were positive only about 32% of the time.

The one ray of hope may be that the sector has fallen so hard, so fast, that it is getting washed out. We had a good indication of that a couple of weeks ago, but they have continued to fall against almost all historical norms, making the "oversold" argument a tougher one to defend.

When we look at the where the S&P Banks Index is trading compared to its 52-week high or 200-day moving average, the current level is as bad as it has ever gotten in the past 19 years.

The only comparable time period since 1989 began on September 21, 1990 as the country was working its way out of the last major, prolonged banking crisis. As deeply oversold as the sector was at the time, it actually continued to drop another 16% over the next month before ultimately bottoming and embarking on a major rally that more than erased those losses within a few weeks.

Obviously we're dealing with something fundamentally different than we were in 1990, but technically the sector is as washed-out as it has been in nearly 20 years. And, again, if the banks can finally get it in gear, then it will provide a major boost to the broader market.

I mentioned yesterday and again this morning that we have a few intriguing signs that equities in general are oversold, based on the recent string of breadth readings and a smattering of sentiment measures. But I wasn't seeing much that suggested anything better than a multi-day bounce in relief, particularly given our context of a bear market, broken up-trend lines and series of lower highs and lower lows in almost all the major indices.

The Nasdaq 100 has been trying valiantly to regain and hold that 1950ish area that marked its most recent breakdown, and as long as it can do that, I have some hope that the recent oversold signals will kick in and give us some short-term relief. Until we see better price action or more-extreme sentiment data, however, I don't have a lot of faith in the idea that we're at a great juncture for long-side investments.

Still Not a Great Looking Setup Here

06/13/08 9:20 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Friday morning...We begin the day with a jump in the pre-market futures, as traders apparently liked the fact that the CPI didn't rise as much as some had feared. Commodities are taking a morning break, which is also helping equity sentiment, but foreign markets are skewed slightly to the downside.

Yesterday we went over a handful of "oversold" types of indicators, ones suggesting that the stiff selling pressure had impacted sentiment enough to give us a temporary break.

In the past when we've seen breadth (advancing stocks minus declining stocks) as bad as it had been leading up to Thursday, the market has had a tendency to stabilize and rise over the short- to intermediate-term. The recent results from the multiple sentiment surveys we follow confirmed the idea that such lousy performance from the broader stock market has been having an impact, driving several of the polls into extreme pessimism territory.

But some of our shorter-term indicators still haven't quite made it to oversold. Put/call ratios have been rising, but really aren't anywhere near "panic" territory. Volatility has been rising, but not spiking enough to consider the latest move irrational. Traders in the Rydex mutual fund family have been pulling money out of the long-side funds, but not at a sustained enough pace to push most of our Rydex-based indicators towards extremes.

One exception is the Beta Chase Index, which I mentioned yesterday. I noted that Rydex traders had finally started focusing on "safe" funds more than "risky" funds - a stark change from earlier in May when they were five times more likely to trade a risky fund than a safe one. As of yesterday, the ratio fell under 0.5, meaning that those folks were more than twice as likely to trade a safe fund than a risky one.

That's a sign of extreme risk-aversion in the short-term, and the market has typically responded favorably going forward. The S&P 500 was higher over the short-term about 65% of the time since 2000, averaging a return just under +1% after previous occurrences of the Beta Chase dropping this low. That's not a huge edge, but it's more positive than random nonetheless.

With the markets in a long-term downtrend, and most of the major indices having broken their intermediate-term uptrend lines from the March low, I've been pretty cautious about buying into oversold readings. My preference has been to concentrate on the Nasdaq 100, which at least still had a series of higher highs and higher lows going for it. That broke on Wednesday, then yesterday it struggled (and failed) to overtake that 1950ish area again that marked the breakdown.

We're still oversold enough on a short-term basis that a re-take of that level should lead to generally higher prices. With this large of a gap up opening, if the indices can make higher highs after the first hour of trading, then there should be more upside to go. If the NDX overtakes 1950 and continues to make higher intraday highs, that should bode well for more gains over the next several sessions.

I'm not particularly excited about that possibility, though...I'd be more interested in selling short the next rally that leads to overbought conditions and signs of excessive optimism. The last such setup we got (at the very end of May) worked well, and as long as we have these troubling technical conditions it's going to be my favored strategy.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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