Snapshot Notes - July 16, 2008


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WEDNESDAY, JULY 16, 2008

Upside Follow Through Helps Bullish Case

07/16/08 3:25 PM EST

As of:

SPX 1213

HELP ARCHIVE

Yesterday morning I wrote about the BKX Banking Index, and how it suffered its worst one-day loss in the index's history. The two other periods that came close in terms of daily losses both coincided with the end of a climactic decline, and spurred short- and intermediate-term rallies, sparked at least 5%+ over the next couple of sessions.

That's taking hold again this time around - and then some - with a 13% rally in that index so far today. If it holds into the close, it would mark the largest one-day gain in that index's history.

The only other day that showed a larger than 10% gain was January 23rd of this year, after which the BKX gained another 11% over the next seven sessions. Using the similar S&P Banks Index, which has a few more years of history, that index showed no one-day gains over 10%, but four of them over 8%. Using the same 7-day look-ahead, the index was higher all four times by an average of +7.8%.

We're not quite seeing the ridiculously lopsided advance/decline or up/down volume numbers I'd prefer to see (with at least 90% of issues and volume being tilted to the upside), but we'll have to see how that looks going into the close. I don't think it's going to get a lot more positive than it is right now, though, with advancers making up about 70% of the total and up volume taking about 78% of total volume.

The pieces seem to be in place for this one-day rally to be different from the others we've seen over the past couple of months that all failed immediately and miserably. The big difference is what we saw yesterday, with the spike in "puke" readings and exceptionally high volume. With today's follow-through, especially in the Banks, I don't see any reason to expect the market to roll over and play dead yet again.

This kind of kick-off so soon after yesterday's surge in new lows looks promising going forward. Going back to 1962, I looked for any time new 52-week lows hit 30% or more of total issues on the NYSE, then the next day the S&P 500 jumped 2% or more. Out of 8 occurrences, the S&P was higher three months later every time, by an average of +8.4%.

There was usually some back-and-forth trading over the next week, but that tended to work itself out within that week, and head generally higher from that point. For those curious, the dates were 07/31/69, 05/27/70, 12/06/73, 09/05/74, 03/28/80, 10/20/87, 10/21/87 and 09/01/98. August 16th/17th of last year just barely missed the cut but would have given numbers pretty much in line with the others.

This activity doesn't necessarily mean we're going to see a straight moon-shot to the upside (especially as earnings reports continue to roll out), but at least we should not see more than 50% or so of today's gains given back over the coming sessions. If so, I'd begin to worry.

We're close to getting some overbought readings among our more sensitive indicators, so I'm not sure how much more we've got to go here, but I like what I see so far and continue to believe the risk/reward in the short- and intermediate-term is skewed to the long side.

New Lows At A Record, Volume Not Far Behind

07/16/08 9:05 AM EST

As of:

SPX 1213

HELP ARCHIVE

Good Wednesday morning...We begin the day with a modest gap up in the pre-market futures after a very volatile morning. Weak foreign markets and bad news on the inflation front (via a higher-than-estimated CPI) drove the S&P futures down about 7 points before renewed optimism about Intel and helpful results from Wells Fargo helped drive us to the current small premium to yesterday's close. Given the early whipsaws, it's hard to say where we'll actually open regular trading hours.

Several times over the past six months, I mentioned that I was looking for a surge in the number of stocks on the NYSE hitting new 52-week lows to surge to 800 or more. Several times we got it, marking the (temporary) end to the decline each time.

We've seen that number or higher the past few days, but yesterday took the cake. According to the Wall Street Journal, new lows on the NYSE reached 1304, a new all-time record. Never before in history have so many securities hit a new low on the same day.

This is even more impressive compared to recent readings because the number of securities traded on the NYSE has been shrinking, not growing. There are around 3250 issues traded on that exchange, down from around 3500 a couple of years ago, and lower than anytime since 1996.

So when we take 1304 issues hitting a new low, divided by 3250 total issues, we get that more than 40% of all issues hit a new low yesterday. That's a remarkable feat that has been matched or exceeded only three other days since 1962 - August 22, 1966, July 28, 1969 and October 19, 1987.

After the 1966 instance, the S&P took another five days to bottom before staging a nice rebound, then a retest of the panic low, then a major 20%+ rally over the next year. In 1969, the market bottomed the next day and rallied heartily for the next three months before rolling over again. 1987 of course was Black Monday after which stocks rallied mightily before undergoing continued massive volatility. You can check out the table from yesterday to see the actual returns going forward.

All of that selling pressure resulted in absolutely huge volume, more than 9 billion shares on the NYSE and Nasdaq combined (using composite volume figures, not just exchange volume). That's the third-highest recent reading I have, behind January 22nd and March 20th of this year. It's not a coincidence that those were also when we saw surges in the number of new lows, and subsequent relief rallies. Huge surges in volume have been excellent precursors to positive returns over the past decade (and more).

Part of the reason given for yesterday's intraday rebound was the huge reversal in Crude Oil. Whether declining Oil prices are good or bad for the stock market is up for debate, but at this point I think a further drop in oil will help relieve some of these excessively pessimistic conditions about the economy and stock market.

Since Crude Oil futures came into existence in 1982, I can find 9 other times when it fell as much as it did yesterday, when its high for the day was within 0.5% of its yearly high. After those 9 instances, Oil was higher a week later only 2 times, and showed an average return of -2.0%. Both of the wining trades led to massive losses shortly thereafter. Interestingly, the S&P 500 was higher after 6 of those instances and showing an average return of +1.4%, with the average winning trade four times greater than the average loser.

All of these factors taken together, on top of the other readings we've discussed over the past couple of days, make me more confident that the risk/reward is finally skewed favorably to the long side in both the short- and intermediate-term here. I have no delusions that it's going to be an easy ride, if it does pan out, due to our continued risk of rumored or actual bank failures and the constant parade of earnings releases, but the setup is here for a temporary relief from the excessive selling pressure.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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