Snapshot Notes - July 11, 2008


	Print Comments

FRIDAY, JULY 11, 2008

Moving Closer, But Still No Real Fear

07/11/08 2:35 PM EST

As of:

SPX 1386

HELP ARCHIVE

It has been a volatile day to end the week, which we pretty much knew coming in given the 50% pre-market haircut on Fannie/Freddie and the surge in Oil prices.

As we went over this morning, when we see a large gap down open then go on to trade below the low during the first hour of trading, it's usually a good sign that there's more selling to come. We got that today heading into the early afternoon, with the S&P 500 losing almost another 20 points from its opening price. A big rally in Lehman brothers (the latest broker rumored to be going under), some stabilization in Fannie/Freddie and a big downside reversal in Oil have helped to lift us off the lows, but it's been messy.

I went back to 1950 to check for anytime that the S&P set new 52-week lows on consecutive days, losing at least 1% intraday both days, but with the second day (i.e. today) closing at least 1% above its intraday low (not sure if that'll happen today, but we have a shot). There were 38 other instances I could find, and for the most part (68% of the time), the index managed to follow through to the upside over the next two trading sessions. After the very short-term, results were mixed and completely in line with random.

About the only time these reversals completely failed to work was in 1974, which is a time period we've had to reference a few times lately. That was one of the few historical market environments where severe oversold conditions and upside reversals failed to take hold, and led to immediate losses. It's one of only a few examples I can find (1969 and 1978 are the others) where oversold did not matter one whit.

We've had occasion to discuss those time periods before because we have been oversold for two weeks now, especially in terms of breadth, and the market has not been able to hold any kind of a bounce for more than a day. This is behavior we have not really seen in the past 25-30 years, and is exceptionally troubling because it makes it very difficult to have much faith in what "oversold" really means at this point.

Because of this behavior, I have been extremely cautious in trying to step in front of the decline. I've wanted to wait either for panic conditions, or a recovery back above 1280ish on the S&P. I'm not a fan of buying into rising prices during a stiff downtrend, but I think another upside reversal would have a pretty good chance to stick. At least enough to justify a small trade.

As for panic, I'm not seeing much of it. Some of the Panic Button indicators are starting to move, but we're not even close to any kind of extreme there. The public's favorite fear measure, the VIX, nearly hit the "magical" 30 level earlier today, which oddly enough may be part of what helped spark the afternoon bounce, it has become so ensconced in traders' mentalities. If we actually did form a lasting bottom when the VIX hit precisely 30, even within a point or two, I would be shocked.

My best guess this morning was that we would see a tough session today, positive developments over the weekend, and a gap up on Monday morning. I have no inside knowledge, obviously, but weekend (attempted) resolutions to major financial crises are a tried-and-true pattern throughout history, and I wouldn't be surprised to see it again, especially so close to political election season.

I'm not trading on that hunch, rather I'm sticking to what I've been mentioning - I have really no desire to trade here, and won't until we either recover enough to satisfy my desire for some price confirmation, or we really crack lower and generate some true panic like other temporary lows over the past year. The VIX hitting 30 ain't enough for me.

The Focus On Fannie/Freddie

07/11/08 9:15 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Friday morning...We begin the day with a large gap down in the major indices as the focus of the entire market rests on Fannie Mae and Freddie Mac, both down about 50% in the pre-market.

They are staging a bit of a rally off the lows as I type, and it should be a wild day in those two stocks - and possibly the market in general - as the news (and rumor) flow winds through and beyond Wall Street. Like the Bear Stearns debacle, there is little other news that will move the markets to any degree today, except the move in Oil and rumors of Israeli military action against Iran. We will be held hostage to those two developments (Fannie/Freddie and Oil).

This is the kind of volatility, and the kind of dire headline, that is more likely to give us those elusive panic readings that we discussed as late as yesterday. The only times in the history of the S&P 500 futures or tracking fund (SPY) when the S&P hit a 52-week low and reversed to close in positive territory (like yesterday), then gapped down 1% or more the next morning, were 03/02/01 and 09/17/01. Neither marked an exact intermediate-term low, but both marked trading lows, at least in the very short-term.

My apologies for just a quick note this morning, I have had some beyond-irritable technical glitches and have not had access to a large part of my data. My thought at this point continues to be that I do not want to be a buyer of weakness just yet - I either need to see some panic, which is not yet evident, or another upside reversal that takes us over 1280ish on the S&P.

Maybe this gap down will be enough, but if we continue to set lower intraday lows after the first hour of trading, then I suspect that we're in for even more severe selling as the day wears on. My best guess at this point is that we have a bad day today, Congress and the Federal Reserve announce a joint rescue of the U.S. secondary mortgage market over the weekend and there is no new developments with Israel, and we see a huge gap up and rally on Monday. Just a guess at this point...I'm not doing any trading unless we hit one of the scenarios I mentioned above.

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.