Snapshot Notes - June 26, 2008


	Print Comments

THURSDAY, JUNE 26, 2008

Not Seeing The Spring-Kind of Concern

06/26/08 1:55 PM EST

As of:

SPX 1386

HELP ARCHIVE

I've been getting asked quite a bit if this is finally the "puke" point like we reached in January and March, when the selling was indiscriminate and the fear was palpable.

I can answer this one easily...it's not even close. When I have to search high and low for signs of panic, I know it's not the same kind of situation. We're simply not seeing the same kind of unbelievable uncertainty reflected in a multitude of gauges that we were earlier this spring.

In January and March, we saw short-term Treasury yields drop 25% - 50% over a period of days as traders sold equities and rushed into the (perceived) safest instruments of all. Today, we're seeing a fairly large move in short-term T-Bonds, but it's nowhere near the scramble we saw months ago.

In the spring, we saw implied volatility levels shoot through the roof as traders were paying up for put protection. Today, put/call ratios are only a little bit high, and volatility is edging up just a bit. It's not required that we see extremes in those indicators to mark a low, but it's odd that we're not seeing more of a reaction in them. Even if traders are using inverse and leveraged inverse ETFs that have burst on the scene over the past year or so instead of buying put options, it wouldn't explain why we're not seeing the same kind of movement in the options market that we did this spring.

This spring, we saw huge daily moves for several days in a row, or in quick succession. Today, we're seeing a large move but it's coming after a period of chop and not in a waterfall-type of manner we did then.

In the spring, breadth was absolutely horrid, with multiple days of 90% or more stocks declining on the day. We've been seeing bad breadth lately, but not on the same kind of level we did then. Today is getting close to some of those extremes with an Up Issues Ratio of around 15% as I type, but previously we had seen multiple days with 90% extremes in breadth (meaning 90% of all stocks were either up or down on the day).

Back then, we saw the number of new 52-week lows on the NYSE shoot up to 700 or more as traders rushed to dump their lagging stocks. Today that number is under 300, certainly not a sign of capitulation. I guess it could be argued that this is a positive divergence, but I don't find those to be reliable signals as they can just keep going and going and going. I much prefer to see a straight-out extreme of at least 700 or more NYSE stocks hitting a new yearly low at the same time.

We do have the Dumb Money down at 29%, which is good and has preceded very nice intermediate-term gains in the past. But as I noted last week, it has not precluded an intra-trade drawdown of 4% or more, so it wasn't necessarily a good short-term buy signal. We'll approach that general drawdown area as the S&P falls to challenge its spring lows, and if enough folks panic over new lows in the DJIA, perhaps we'll generate the kind of readings that would have me more interested in buying into this kind of a decline.

I'm not seeing it yet. That doesn't mean we can't bounce or even form a bottom right here, right now, but in terms of risk/reward I'm not seeing nearly the same kind of edges that were plentiful at the other lows over the past year. A big intraday reversal on exceptionally heavy volume might help the odds of a further bounce, but we would have to take that as it comes.

Once Again, The Post-Fed Move Is Reversed

06/26/08 9:45 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Thursday morning...We begin the day with some major weakness in the indices and almost all major sectors except the "evil twins" of Gold and Oil, both of which are up more than 2%. The dogs of the morning are Housing and Financials, which has been the typical pattern on these bad days.

Yesterday we went over a few different looks at how the market tends to behave surrounding scheduled FOMC meetings, and yesterday held fairly true to the past, though we didn't so much get a trending move into the close like usual.

I mentioned late in the afternoon that we were seeing a rally that we probably did not want if we're bullish. I know that's counter-intuitive (if we're bullish, why wouldn't we want the market to rally?), but the fact of the matter was that we very often see the market reverse an extreme move after the FOMC decision. As we discussed yesterday, when the market has a positive reaction, it tends to get beat back in the days following.

The late downside reversal into the close dampened that somewhat, but this morning we're seeing yet more of a give-back of the post-FOMC rally. We may see yet more selling pressure - there have been four other times when the S&P gapped down 1% or more the day following an FOMC meeting, and it closed higher than the open only one time (which was the last occurrence in January of this year).

Other than that instance, when the S&P 500 gained nearly 3% during the day, the other three occurrences all sold off more than an additional 1% during the day. So it looks like either feast or famine for today based on those precedents. In the several sessions following those other instances, the market was mixed and I couldn't find anything consistent about them.

I'll be watching the first hour's low carefully this morning. When we see a big gap down in the indices, and then they go on to set lower lows after the first hour of trading, it's quite rare to see an upside reversal later in the day. If the low can hold past the first hour, then we should have a better shot at reversing some of these losses.

I'm not all that eager to see them reversed right away, rather I'd like to see us drift lower and generate some additional extremes among our sentiment guides. We were on the cusp of what looked like a real opportunity before the rally of the past couple of days, and now it's going to take some additional downside work to set that up again. The DJIA breaking its March lows may be what we need to finally generate some panic in the hold-outs among our sentiment indicators.

On a side note, I've received a few questions about yesterday's extremely high reading in the ISE Call/Put Ratio, hinting that traders were way too optimistic about yesterday's rally. While that could have something to do with it, Adam Warner on his entertaining and insightful blog Daily Options Report, suggested that one reason for the trade was due to a call spread in the Energy SPDR fund (XLE). Indeed, for that fund yesterday, there were 875 times more call options bought to open than puts, which fits with Adam's point. We should always be on the lookout for exceptionally large one-off trades when we see one-day extremes in options indicators, and this is a perfect example.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.