Snapshot Notes - July 1, 2008

We're seeing a large - and unusual - reversal today, as the indices have swung violently from the opening bell.

The gap down was bought immediately and took us high enough to close the gap (that's usually good), but then enough selling pressure took over to push us to new intraday lows (that's usually very, very bad). But now we've reversed back enough to (so far) trade above yesterday's close (that's good again).

I checked the history of the S&P 500 for any time it dropped at least 1% intraday to set a new three-month low, then reversed enough to close in positive territory. Its recent track record has been good at highlighting turning points.

S&P 500 Performance When It Hits a 3-Month Low By Losing 1%, Then Closes Higher
Date	1 Month Later
07/24/02	+14.1%
10/10/02	+11.3%
03/12/03	+8.4%
05/12/04	+2.6%
06/08/06	+0.8%
03/14/07	+4.7%
08/01/07	-0.6%
08/16/07	+4.6%
01/23/08	+1.1%
Average	+5.2%

But - and this is a BIG but - I was selective with the start date. If we go all the way back to 1950, then the one-month return was positive only 54% of the time and averaged +1.0%. There were several false starts prior to July 2002, and continually buying the reversals did not work well at all.

I do place more weight on recent history, due to the constantly-changing nature of market dynamics, so I would consider today's reversal (if it holds into the close) to be a positive sign, but it would be a mistake to ignore the less-friendly precedents prior to July 2002.

Given the data we went over earlier this morning, the seemingly successful test of the March low in the S&P 500, the continued out-performance of the technology sector, today's impressive intraday reversal, and the pending positive seasonality, I think the chances are fairly high here that we continue to recover in the short-term. I'm still not nearly as enthused about the upside possibilities as I was in January or March, though, and if we cannot hold today's reversal into the close then the setup becomes much less intriguing. All bets would be off if we drop below the March low (around 1255ish in the S&P 500 cash index).

Good Tuesday morning...We begin the new month with a bang, as the pre-market futures are down sharply, the "evil twins" of Gold and Oil are rallying hard, foreign markets have been slapped with 2% losses almost across the board, and there is little letup in the stream of bad news from the financial sector.

The lackadaisical trading of the past few days has been enough to push the Dumb Money Confidence to a further extreme, knocking it down to 21% as of yesterday's close. Last week I showed the S&P 500's returns following readings of 29% or below, so let's just update that with readings of 21% or below:

S&P 500 Performance When Dumb Money Confidence Equals 21% Or Less
	5 Days	10 Days	1 Month	3 Months
	Later	Later	Later	Later
Avg Return	+1.6%	+2.8%	+5.6%	+12.8%
% Positive	70%	79%	91%	99%
Avg Max Gain	+3.4%	+5.0%	+7.7%	+15.7%
Max Gain	+14.1%	+16.0%	+19.3%	+33.2%
Avg Max Loss	-2.5%	-3.0%	-3.6%	-4.1%
Max Loss	-14.0%	-14.0%	-14.0%	-15.5%

There actually isn't much of a change - pretty much the same instances popped up during the test. We still see a lot of short-term volatility, and very positive intermediate-term returns. That hasn't changed from last week. The big drawdown was at the end of August 1998, when we were seeing signs of excessive pessimism but the market still cracked hard over a three-day stretch to end the month before recovering.

I mentioned in the last longer-term comment that although the Dumb Money was low, we weren't seeing several other indicators we track follow suit with extremes. That also hasn't changed too much in the past week - put/call ratios are still relatively tame, volatility (both historical and implied) hasn't reached any kind of extreme, and the Stock/Bond Ratio isn't yet stretched (though it's getting close, quickly).

On the positive side, only 16% of S&P 500 components are above their 50-day moving averages, which is in oversold territory and could match the sub-10% readings we saw at the prior lows over the past year with a bad day today. And Rydex traders have been moving out of bullish funds, pushing some of the bull/bear ratios we watch towards extreme territory. As of yesterday, only 15% of the funds had assets that were above their 50-day averages, low enough to be considered oversold.

So we continue to register more extremes on an intermediate-term basis, but we're still not seeing the confluence of extremes we saw at the August, November, January or March lows. Even the "Panic Button" indicators I showed yesterday have barely ticked higher. If we're trying to find a spot to buy during an ongoing bear market, its' very tough to do so when we're not staring at a bevy of clear historical extremes...and we're still not at the moment.

Shorter-term, the S&P has gapped down 1% or more on the first day of a new month 6 times (using S&P futures from 1982 - 1994 and the SPY tracking fund from 1994 - present). Buying the open and holding 'til the close resulted in four winners, two losers. The winners averaged +1.2% while the losers averaged -1.9%. I could not find any consistent flag among the instances that would have helped us determine which would be a winner and which a loser.

Buying a 1% gap down open when the Dumb Money is 21% or below has done fairly well, with 11 winning trades out of 14 attempts and an average return of +1.3% by the close. Only four of the winning trades suffered an intraday drawdown of -0.5% or more, suggesting that if we see the S&P lose more than that from today's open, we may have to think twice about the chances of a major upside reversal before the close.

With this big gap down and a little further push, the S&P will approach its lowest low from March at 1256. If we were seeing the kinds of sentiment readings we were then, I would be looking to be an aggressive buyer at the open. But we're not, and I am not. Like we saw with 1275, if the S&P hits 1250ish, it's on enough radar screens that I think we'll see a short-term bounce. But I'm not convinced that now is a good enough time to be trying to add aggressively to long positions for either a trade or an investment.

A small allocation based on the several extremes we have seen, with an intermediate-term time frame, may end up proving fruitful but I just don't see the kind of edge that would make sense for a large trade from a risk/reward perspective right here. If we get a weak close, above 1250, then something better may set up for a short-term trade heading into the July 4th holiday but right now I'm not eager to buy...especially if we go on to make a lower intraday low after the first hour of trading.

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