Snapshot Notes - June 17, 2008


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TUESDAY, JUNE 17, 2008

Not Trusting Further Gains to Last

06/17/08 9:15 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Tuesday morning...We begin the day with about as big a gap up opening as we got a gap down yesterday. The futures have been climbing all morning, and got a little bit more of a bump after the crop of economic reports was released. Commodities are pulling back, foreign markets are mostly strong, the Dollar is holding and all looks well with the world at the moment.

Yesterday I showed a chart of a handful of indicators that I use to get a quick framework for our short-term situation. Over the years, I've found these particular ones to be consistently useful, and they cover a decent cross-section of our broad indicator categories. These are by no means the only ones I follow, or necessarily the "best" ones, they are just the ones I like to use to get a quick snapshot of where we stand.

Let's take a look to see how they've changed since yesterday:

The technical picture of the S&P 500 hasn't changed at all, of course - it's going to take a lot more than a tiny up day to fix this. We need to see the pattern of lower highs and lower lows reversed, which will only make the trend neutral instead of negative. To turn positive, I need to see the downtrend since October broken, and the 200-day average turn up. That will take some work (and time).

The selling pressure has let up significantly over the past few days, as the Down Pressure gauge has cycled all the way back to overbought. It's currently at its most-stretched point since the May market peak, and it's fairly easy to see on the chart that whenever that indicator has reached the red dotted line this year, the S&P has had a bugger of a time holding on to any further short-term gains.

The percentage of S&P 500 stocks trading above their 10-day average has fully worked off its oversold reading and isn't telling us much now. Neither is the Equity-only Put/Call Ratio, which never reached a level where we could say with confidence that traders were overly concerned about a major decline.

The Rydex Beta Chase Index recently showed that Rydex mutual fund traders were buying "safe" funds at a 2-to-1 clip over "risky" funds, a sign of severe risk-aversion and usually a positive sign for the market. That has worked so far, and we're not seeing those traders rush back to taking on risk just yet.

The Short-term Indicator Score has moved all the way to 33%, from a multi-month extreme of 77% just the other day. That's a pretty quick turnaround, and generally the market has struggled to sustain further gains after such readings.

I checked for any time the Score was 35% or below, and the S&P gapped up at least +0.75% at the next day's open. Buying the open and holding until the close actually resulted in 9 winning trades out of 11 instances, and an impressive average return of +1.3% (8 of them were in the year 2000 alone).

But like I've been noting, it's been tough for the market to sustain those gains...buying the day's close and holding for three days resulted in only 2 winners out of the 11 trades, and an average return of -1.1% (if it happened on a Tuesday, then the S&P went 0 for 3 with a -2.1% average over the next few sessions).

I mentioned yesterday that if we got a gap up opening based on the economic releases, then I'd look at a possible short sale in the broader averages. However, looking at how the market has performed in the past when it gaps up after being this stretched, it has often been able to continue to make gains during the day before giving those back during the next several sessions. With that in mind, I'm not going to be in any rush to sell this rally short today; rather I'll give it some time and see if the bulls can push further, especially given the low volume. If the S&P jumps to 1380ish near the close or into tomorrow morning, then that should present a better risk/reward for betting against more of a rise.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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