Snapshot Notes - June 24, 2008


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TUESDAY, JUNE 24, 2008

Bulls Probably Shouldn't Wish For a Rebound Here

06/24/08 3:00 PM EST

As of:

SPX 1386

HELP ARCHIVE

Despite the rebound in some of the harder-hit sectors like Housing and Banks, most stocks on the NYSE continue to lag behind yesterday's close.

Using all securities on the NYSE exchange, right now there are about 600 more issues below yesterday's close than above. With an up day in bonds today, that is helping matters a bit, so when we look at common stocks only, the negativity grows with about 800 more stocks down than up.

This is relatively unusual given the big push today in banking shares. I checked for any time the S&P Banks Index was up 2.5% or more on the day, but there were more declining stocks than advancing ones on the NYSE. Using the performance in the S&P 500 tracking fund, SPY, that fund was higher a week later 12 times out of 15 occurrences, and showed an average return of +1.8%. If breadth was as bad as it is today, that left only one single precedent - August 16, 2007, the day of that intermediate-term low.

In May, we looked at what has happened to the S&P when Banks are lagging badly, and it was a negative for the broader market; this looks to be the opposite.

This morning I mentioned that if the S&P was down three days in a row heading into an FOMC interest rate decision, then it has tended to close in negative territory that day (the day of the decision) as well. But it rebounded the following day all five times it has occurred.

We're seeing an intraday rebound today, so I modified the study to see if there were any times the S&P was down two days in a row, dropped at least 0.5% the day before the meeting, but reversed to close the day in positive territory. In that case, there were six precedents, and the S&P closed in positive territory on FOMC day two of those six times.

More interesting, though, is that it closed the following day in positive territory only once, and showed an ugly average return of -1.6%. Buying the equivalent of today's close and holding through Thursday's resulted in one winner of +0.3% and five losers averaging -2.6%. After the first day or two, though, the S&P's returns were more in line with random and perhaps even a little more positive than that.

So I'm not all that impressed with today's rebound given tomorrow's unknown, though the jump in the Banking sector is welcome and looks to be a positive influence looking out just a bit longer than the next few days. Based on how the market typically reacts, longs would probably be better served by less of a rebound today and tomorrow, and in fact it would probably be better if we continued to sell off through tomorrow afternoon. There is a consistent tendency for the market to reverse trends heading into and after FOMC rate decisions, so a sell-off should lead to a better, more sustainable rebound, particularly with the intermediate-term sentiment condition where it is at the moment.

If We're Weak Into the FOMC, We Should See a Snapback

06/24/08 10:00 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Tuesday morning...We begin the day with some follow-through weakness from yesterday's narrow-range session. We can take our pick from any number of possible excuses, from higher Oil prices (again) to weak foreign markets (again) to hints of pass-through inflation (again) as Dow Chemical raises its prices, to signs of a slowing economy (again) as UPS warns.

Yesterday I mentioned that although there were some positives on a longer-term basis like we discussed in the latest longer-term comment, on a short-term time frame we really weren't seeing many extremes. That's odd given the selling pressure of the past several days, but during downtrends it sometimes take a real whallop before we reach oversold.

We also of course have the FOMC decision coming up tomorrow afternoon. There hasn't been a real consistent bias surrounding those days, particularly recently as traders seemingly want something different from the Fed each time. One month they want some reassurance that we're not going to slip into recession, the next they want to be coddled about expectations for inflation.

I showed a chart yesterday which showed that expectations for a rate increase have fallen off dramatically during the past couple of weeks, declining from a 40% chance on June 10th to only 10% as of yesterday, which is where it remains today. With a 90% probability of no change in rates according to the Fed Funds futures market, that's what I'm assuming we'll see tomorrow.

The market's reaction is much tougher to game. About the only consistency we've seen is that the market has a (slight) tendency to drift higher the morning of scheduled FOMC meetings, then suffer two or three violent whipsaws right after the decision, before a more trending move into the close. Whatever the reaction, if it is extreme enough, we usually see a reversal of that afternoon move over the next several sessions.

There have only been five times that I can find that the S&P has dropped for three straight sessions heading into an FOMC decision, which it would do today assuming this morning's weakness sticks. On the day of the decision, the index actually closed higher only one time, averaging a loss of -0.3% on those days. But the following day, it closed higher all 5 times by an average of +1.4%, helping confirm the reversal tendency I noted above.

I'm still not seeing too much on a short-term basis that's getting me excited about the prospects for a snapback, but that would almost certainly change if we slide again today and have a poor reaction to tomorrow's Fed decision.

It would be hard to fathom that we would not be short-term oversold at that point with some signs of panic as the DJIA breaks its March lows, and again we would have the post-Fed reversal thing working as well. Combined with the still-intriguing Dumb Money Confidence that has had such a good record at highlighting intermediate-term buying opportunities, that scenario would get me more interested in taking a stab at the long side for a trade, even within the context of an ongoing bear market which I see no signs of ending anytime soon.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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