Snapshot Notes - June 19, 2008

Good Thursday morning...We begin the day with little movement in the pre-market futures as the news flow has been relatively slow (welcome to the summer). Commodities are mostly flat, as are the major currencies and most foreign markets. At 10:00am EST we will have two possible market-moving econ reports, so that will be something to watch for.

Yesterday I noted that although many of the sentiment surveys we follow were showing an extreme level of pessimism, some of the other real-money sentiment measures weren't quite at the same level of extreme.

But what we have seen is enough to push the Dumb Money Confidence down to 33% as of yesterday's close, the lowest level since late March. The Dumb Money is a much better timing tool than the Smart Money, and historically whenever the Dumb Money has gotten this low (regardless of where the Smart Money is), stocks have tended to respond well.

The table below shows the go-forward performance in the S&P 500 when the Dumb Money hit this level or lower since 1995 (when the series became consistent enough to use for testing purposes):

S&P 500 Performance When Dumb Money Confidence Equals 33% Or Less
	5 Days	10 Days	1 Month	3 Months
	Later	Later	Later	Later
Avg Return	0.8%	1.6%	3.9%	10.0%
% Positive	67%	72%	84%	93%
Avg Max Gain	2.7%	3.9%	6.2%	13.1%
Avg Max Loss	-2.3%	-3.1%	-3.9%	-4.5%

We can see from the table that the S&P tended to do quite well going forward, particularly the longer out we look. By three months later, the index was positive 93% of the time (246 out of 264 days), with a very solid average return of +10.0% and an average reward that was nearly three times the average risk.

The short-term wasn't quite so rosy. Although the S&P was positive overall, the max risk was about equal to the max reward, definitely not what I like to see when considering whether something provides us an edge or not - I want to see a ratio of at least two or three to one when looking at max reward versus max risk. The Dumb Money Confidence doesn't provide us that kind of short-term edge until it drops to 20% or below, which would take quite a few more extremes among our sentiment indicators.

So things are quickly beginning to look better from an intermediate-term standpoint than they have in two months, but that doesn't preclude some short-term volatility (both ways).

Heading into Tuesday, several of our shorter-term guides had become as overbought as any other time in the past several months, and given the exceptionally poor technical condition of the S&P 500 and DJIA, such overbought readings didn't look like the best time to be holding long positions.

Over the past month or so, the market has not responded very well to short-term oversold conditions, and it has sold off almost immediately after becoming overbought. That is a hallmark of weak markets, and when combined with the overall technical condition (declining 200-day moving averages, broken uptrend lines from the March lows, the series of lower highs and lower lows), it's going to take either better price action or some true sentiment extremes to get me interested on the long side again.

We have a hint of oversold conditions at the moment, at least among the most sensitive indicators we watch and update intraday, so perhaps we'l see a short-term bounce in relief as we head into option expiration and the S&P and DJIA hit possible support levels. But I'm not seeing the kind of high-probability edge here that makes me want to try to trade for that bounce, rather I'd be more interested in either shorting the next round of overbought conditions, or wait for a better oversold condition to establish some longer-term long positions based in part off the very low Dumb Money reading we're seeing.

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