Snapshot Notes - June 16, 2008


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MONDAY, JUNE 16, 2008

Getting A Bit Overbought

06/16/08 3:25 PM EST

As of:

SPX 1386

HELP ARCHIVE

This morning we went over a chart that showed handful of breadth and sentiment indicators that I watch to get a feel for our short-term situation, and they showed clearly that we had reached such a high level of selling pressure by mid-week last week that there should be a bit more upside to go in relief.

Now that we're getting some follow-through, our more sensitive indicators are beginning to flirt with overbought levels, particularly on the Nasdaq 100. The STEM.MR Model for that index has moved outside of its overbought trading band for the first time since late May, and the market has recently had trouble making headway after such overbought readings.

We also have the "Turnaround Tuesday" tendency approaching. We recently discussed this, and showed that when the market was in a short-term trend entering Tuesday and/or Wednesday, it tends to make a counter move - especially if the prior move was strong.

I checked for times when the Nasdaq 100 was up 1% or more on Friday, then up at least 0.75% on Monday. Buying Monday's close and holding through Tuesday yielded only 39% winning trades since 1989, averaging -0.4%. If we use the Nasdaq 100 tracking fund, QQQQ, the results were the same, but when we see volume at the lightest pace it had been in two weeks, like it looks like it's going to be today (too many traders watching the U.S. Open playoff I guess), then the fund was only 2 for 10, and averaged -1.0%.

We should also keep in mind that we have a flurry of economic reports in the morning, and with the markets in flux over the battle between wanting to see signs of growth and fearing signs of inflation, these should be market-movers. All of them come out before the open tomorrow.

So with a market that is becoming overbought, possible technical resistance ahead, a spate of economic reports before the open, and the tendency to see reversals from a strong Friday/Monday combination, I don't have high hopes for seeing much more of a sustainable rally in the short-term, and will look at taking a shot on the short side if we see a gap up opening tomorrow based on those econ reports.

Some Room For a Rally, But We Have to Hold Here

06/16/08 9:20 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Monday morning...We begin the new week with a moderately-sized gap down in the pre-market futures. Despite some Mid-East jawboning, Oil is shooting higher once again, Lehman Brothers confirmed that they're a train wreck, GE got a brokerage-firm downgrade (seriously, who really cares about that?), and it will take traders a couple of hours to sort through the other tidbits and everyone else's reactions to it.

One of the questions I get frequently revolves around how to use the site - there are so many indicators available, how does one possibly pick the best ones?

The first step is to define one's time frame, but I'm assuming that if you're reading these comments then you're either a shorter-term trader (with a time frame of days to weeks), or you're a longer-term investor quickly scanning for a trading overview.

With that in mind, everyone has their own favorite indicators, the ones that make sense to them and they feel comfortable with. It's no different for me, and over the years I have developed a feel for my own core group of indicators that I prefer to follow.

In the chart below, I've plotted together the five indicators that I use as my base of trading indicators for the S&P 500, each of which tracks a different aspect. All of the indicators are updated daily on the site, and each of them have in-depth descriptions (found on the Complete List of indicators), so I don't want to get bogged down with explanations of what each of them are.

I do, however, want to touch briefly on what the overall chart is suggesting.

First, there is no question that we are in poor technical shape.

I'm currently training for an off-road sprint triathlon, and in my first real test of one leg of the race (a 5-mile kayak paddle), I realized quickly that I was, umm, not quite ready. I feel the same way about the S&P...it had a chance to prove itself after breaking down from its March uptrend line, and it failed miserably. Combined with the downward-sloping 200-day moving average, this is not a good situation.

The one saving grace for the short-term may be that it just got bad enough that we could/should bounce. Almost all of the five indicators reached oversold levels by mid-week last week. Down Pressure on the S&P was extreme (and even moreso on the Nasdaq 100); fewer than 10% of the components in the S&P were trading above their 10-day moving averages; Traders in the Rydex family of mutual funds were concentrating on risk-averse "safe" mutual funds at a 2-to-1 ratio to "risky" funds; and our Indicator Score had jumped to 77%, the highest concentration of panic readings since the March low.

The one exception was the Equity-only Put/Call Ratio, which never registered a reading of concern last week, much less fear or panic. The R.O.B.O. Put/Call Ratio that we calculate did become a bit more extreme last week, meaning that the very smallest of options traders were looking to protect their portfolios a bit more than they have been.

Last week, they spent 23% of their volume buying protective put options, a fairly big increase from the 17% level they were at in May. But they're still spending 38% of their volume on speculative call options, not far from where they were last month, and well above the ~30% level I'd like to see to think that they've backed off enough from speculative trades on a rising market. So options trading is one missing piece from an oversold sentiment picture.

One interesting development from last week was that the latest Commitments of Traders report showed a big decrease in the net position of small speculators in the index futures. Over the past year and a half, I've mentioned frequently that I have downgraded the weight that I put on this data, as the influence of off-exchange derivative trading has seemingly compromised the consistency of this data.

But the latest report did at least get my attention, as the chart we post on the site shows that small specs reduced their net long position in S&P, NDX and DJIA futures to under $10 billion. From a contrary point of view, such a low net long position from these traders has been welcome, as it is a sign of pessimism from wrong-way traders.

This is the third-lowest reading since 2000, trailing only late September 2007 and early February 2008. The Sept 2007 signal wasn't a great one, as the S&P topped out a couple of weeks later, and the Nasdaq a few weeks after that (though by that time, speculator positions had increased to $15 billion).

Like I said, I don't have a lot of faith in this data for the equity index futures, but it's a potential positive from a report that hadn't really shown us any kind of extreme for the past several months.

On Friday, I noted that the banking index has gotten hit as hard over the past few weeks as any other time in the past 19 years. If that sector can finally get off the ground for more than a day, then it will without question be a major boon to the broader indexes. And with the oversold conditions from last week that we saw in the chart above, if we saw a recovery from Thursday's downside reversal, then there should be some more upside left, even in the context of the poor technical conditions. I was watching the Nasdaq 100 in particular, with a move back over 1950 suggesting sellers were likely exhausted for the time being.

This morning we're getting a largish gap down open, as traders try to digest the flurry of weekend news. Monday morning gaps are not reliable indicators for the day's trading, so I'm not reading too much into the pre-market activity. Just as a quick example, whenever the S&P 500 tracking fund, SPY, has risen 1% on a Friday then gaps down 0.5% or more on Monday, buying the open and holding 'til the close resulted in 5 winners out of 8 trades for an average of +0.8%. Not a big enough edge to trade, but a little confirmation that this morning's gap isn't necessarily a reliable gauge. For the day, I'm still using that 1950ish area on the NDX as a fulcrum, with the idea that if we can hold above, we should still have some room for a short-term rally. If we can't hold it, I'm not holding my breath.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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