Snapshot Notes - July 2, 2008


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WEDNESDAY, JULY 2, 2008

Buyers Are Just Not Willing To Stick Around

07/02/08 3:00 PM EST

As of:

SPX 1386

HELP ARCHIVE

We started off OK today, but buyers have not shown any interest in sticking out their neck ahead of a long weekend. We saw a valiant effort earlier this afternoon to rally after a morning failure, but a quick $3 rally in Oil squashed the equity rally in a hurry. These intraday Oil spikes have been absolute killers for stocks over the past couple of weeks.

Yesterday we went over 9 dates where the S&P had lost 1% intraday to set a three-month low, then rallied enough to close in positive territory. It seems as though it should be best if the market followed through immediately after these reversals, but that wasn't necessarily the case for most of the prior instances - in 5 of the 9 cases, the S&P was actually trading lower two days later.

But two or three more days of selling pressure was typically all we got before the market took off again - and it was rare to see the S&P trade below the low of the reversal day and still rally in the days and weeks afterward (only two of them did that). That gives a little more added importance to yesterday's low around 1260, and of course the March low just a few points below that.

Over the history of the S&P, I can find 109 other times where it sold off 0.75% or more on the 2nd-to-last day before an exchange holiday. There was a pretty good tendency to see a bounce the next day, with the index higher 69% of the time. The gains weren't that great, however, with only a +0.4% average and an average maximum loss (-1.6%) that exactly equaled the average maximum gain. That's not the kind of stat I like to see in order to consider something a solid edge.

I mentioned this morning that given the data we went over yesterday morning and the latest I.I. readings, the seemingly successful test of the March low in the S&P, the continued out-performance in high-beta sectors, yesterday's intraday reversal, and positive seasonality surrounding the upcoming holiday, the chances appeared decent that we would continue to recover in the short-term.

Apparently most others felt the same way, as pretty much every trader I talked to and article I read this morning also mentioned the good chance for a bounce. Days like today are what happen when too many expect the same thing and it doesn't turn out as expected - we get a steady drop as the late buyers sell off their immediate losers.

I still think the probability of a recovery isn't totally dead just yet, especially as we approach the holiday. But I won't be willing to stick around with that idea if we break the recent lows, and even the S&P trading back under 1275 makes me uncomfortable. This is not good behavior, and I continue to think the only long-side trade here is a small one and for a short-term trade attempt only.

Newsletters About As Bearish As They Get

07/02/08 9:20 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Wednesday morning...We begin the day with a bit of upside follow-through in the pre-market futures. Commodities are backing off just a little, foreign markets were mostly strong, but the ADP employment number came in much weaker than expected which knocked the futures off their morning highs. This is widely watched as a precursor to tomorrow's jobs report, and although the correlation between the two is relatively weak, it is still seen as a leading indicator and a heads-up that tomorrow morning's important report could hand us a negative surprise.

A common topic of conversation today will surely be the latest survey results from Investor's Intelligence, which showed another huge move to the bearish camp among the newsletters polled. The Bull Ratio (bulls / (bulls + bears)) dropped under 42% this week as there was a surge in bearishness. This is the lowest since the March low, and qualifies as one of the lowest readings of the past decade.

As you can see from the chart, previous instances of the Bull Ratio falling below 45% (the green arrows) have highlighted past intermediate-term lows with great regularity. Out of the 11 weeks since 1997 that showed a ratio under 45%, the S&P 500 was higher a month later 10 times by an average of +4.0%.

During the month, the average drawdown (i.e. maximum loss) was -3.6%, but that was mostly due to two weeks in September 1998 when the S&P lost about 10% before recovering. Without those two, it would have averaged -2.0%. The average maximum gain during the next month was +6.2%, with two instances scoring intra-month gains greater than +10%.

I showed some dates yesterday of previous times the S&P 500 has dropped 1% intraday to trade at a new three-month low, then reversed to close in positive territory. It has nailed almost perfectly the majority of the major lows since July 2002, but as noted yesterday, prior to then it gave several bad false signals.

Still, given the data we went over yesterday morning and these latest I.I. readings, the seemingly successful test of the March low in the S&P, the continued out-performance in high-beta sectors, yesterday's intraday reversal, and positive seasonality surrounding the upcoming holiday, I think the chances are decent that we continue to recover in the short-term.

I'm not as enthused about our one- to three-month prospects as I was in January or March, but if we can get something going over the next few days, it may help form a better base on which we can build a more lasting low - either that, or we'll roll over and break the lows which should give us the types of readings we more usually see at multi-month bear-market lows. I'm not counting on any potential upside here as anything more than a trade just yet.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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