Snapshot Notes - July 15, 2008


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TUESDAY, JULY 15, 2008

A Couple Of Notable Readings

07/15/08 11:35 AM EST

As of:

SPX 1213

HELP ARCHIVE

We're getting a push off the low this morning, helped along by a plunge in Oil. Before the reversal in that commodity, though, we were getting hit hard, hard enough to generate a couple of notable signals.

One of the "panic" indicators we discussed in March was the ratio of the VIX implied volatility gauge to the yield on 10-year Treasury Notes.

Today, with the VIX popping up above 30 and the yield on 10-year TNotes falling to 3.80, the ratio is once again well over the threshold of 7 that we outlined on March 14th. Here is the table that we showed in March:

If we add the returns for the March 2008 instance, the numbers for the 5-day through 3-month returns would read +4.8%, +2.7%, +3.6% and +5.6%, confirming the bullishness of the prior readings.

We're also getting a huge surge in stocks hitting new 52-week lows on the NYSE. Over the past couple of days, the reading has been around 800, but today it is pushing well over 1,000 for one of the few times in history. 10/19/87, 08/31/98 and 08/16/07 are the only other dates.

As the number of stocks traded on the exchange changes, though, the 1,000 number increases or decreases in importance. So let's look at what's happened in the past when more than 30% of all issues hit a new yearly low on the same day:

The signal was very good in the short-term, with 15 of the 17 showing a positive return over the next few sessions. The two losers were limited compared to the average winner.

Longer-term, the data was mixed, because many of the instances occurred during the protracted bear markets of the late '60s and mid '70s. Those are time periods we've touched on more than a few times over the past couple of weeks, as 1969, 1973 and 1978 were really the only periods in the past 58 years where stocks got as oversold as they are now and weren't able to hold a rally.

Even during those woeful years, though, bouts of wholesale selling like we saw this morning led to short-term reprieves. Combined with the spike in volatility and rush into Treasuries we're seeing this morning, a flush down in the TICK which has been consistent with past lows, and the other data we discussed over the past couple of days, we should be within a day or two of a tradable low, if today's intraday rebound doesn't stick.

Volatility should remain exceptionally high as we deal with the week's economic reports, earnings releases, option expiration adjustments and headline risk tied to the banking sector, but I'm beginning to think that even in the short-term now, we'll be seeing generally higher prices. More than anything, I'm watching the BKX Index and the USO oil ETF for clues on whether today's reversal is going to stick. We need the former to go up; the latter down.

Short-term Volatility Should Lead to Higher Prices

07/15/08 9:20 AM EST

As of:

SPX 1386

HELP ARCHIVE

Good Tuesday morning...We begin the day with a relatively large gap down opening, to which you could assign any number of excuses - a crumbling Dollar, another surge in commodities prices, weak foreign markets, additional bank failure rumors, weak corporate outlooks...

Coming into this week, something we had discussed in almost every note during the prior two weeks was that despite low sentiment numbers, we were not seeing any signs of panic or excessive uncertainty. And those kinds of readings are what we need to see in order to be able to judge risk/reward if trying to step in on the long side with any confidence.

That changed by Friday afternoon, with a jump in new 52-week lows to a level that has coincided with other bear-market lows. Combined with the dire headlines related to IndayMac and Fannie/Freddie (and subsequent market performance after other large bank failures), it looked like we had finally hit some of those panic levels.

Something else I had decried repeatedly was that unlike January and March, what we weren't seeing were any solid price patterns. Extreme multi-day moves, big gap openings, large reversals...the kinds of things we saw at those lows that helped trigger a tradable bounce. That, too, is starting to change.

If we continue on this spiral lower, it will mark the 7th straight losing week for the S&P 500. There were only three other periods that matched this mark - May 11, 1970, March 24, 1980 and March 12, 2001. The latter two marked the terminal stage of the decline, while the instance in 1970 had one more (nasty) week before embarking on a year-long bull run.

We've also seen Friday/Monday down closes with at least a 2% loss heading into option expiration. When that's happened in the past, the rest of the week showed a positive return 6 of 7 times with an average of +1.7%. The lone loser was the outlier from the week of the 9/11 tragedy.

One more, very simple test - what's happened when the prior day closed at a 52-week low, and today we're gapping down as much as we are this morning? Out of 13 previous cases, the short-term was very mixed, in line with random. By three days later, 9 of the 13 were positive with an average of +1.0%. But by one month later, 12 of the 13 were positive and sported an average of a very impressive +6.6%. Virtually all of these occurred during the last bear market, with two other recent occurrences - January 22nd and March 7th of this year.

As far as the Banking sector goes, I'm not even sure what to say about that. We're seeing an unprecedented display of weakness there, at least as far back as my data goes (1989). The loss in the BKX Index yesterday was the greatest in that index's history (back to 1993), with two others coming close. Those were 10/27/97 when it lost -7.5% and 4/14/00 when it shed -7.1%. Both marked the beginning of a short- and intermediate-term rally in the index, with it rebounding at least +5% over the next couple of days both times.

That's interesting, especially when we combine it with the usual market performance after big bank failures. It certainly seems like we've seen the exhaustive move in that sector that should lead to a rebound. However, I am skeptical of the limited history we have for that sector (and previous studies suggesting a bounce that have not come to fruition, or led to only very short-term reprieves), and I am staying away from trying to trade any kind of a potential bounce there directly. Rather, I'm sticking with broad-market trades that would certainly benefit from a recovery in that specific sector.

I mentioned yesterday afternoon that I was finally starting to establish some intermediate-term longs, but as far as short-term trading goes, I was staying away. That's still the case - between the multitude of economic releases, earnings reports and headline risk, we should continue to see extreme volatility and large gap openings this week, today being no exception.

I do think a continued sell-off this week will be exhaustive and we'll end up with higher prices than we saw on Friday over the coming weeks, but I'm not sure of the path to get there. I'm not ready to step in on a short-term basis just yet, as we haven't quite seen the "whites of their eyes" trade like we did a couple other times this year. Bottom line, we could/should rebound any time, I'm not trading it yet in the short-term, but I do like our one- to -three month outlook.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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