Snapshot Notes - July 17, 2008


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THURSDAY, JULY 17, 2008

Follow-through Is A Welcome Change

07/17/08 2:55 PM EST

As of:

SPX 1251

HELP ARCHIVE

Today's follow-through to yesterday's big rally is encouraging, as it marks the first time the market has been able to tack on additional gains after a big up day in nearly a month (assuming we hold into the close of course).

It's possibly even more impressive when put into an historical context. There have been six times since 1950 when the S&P 500 set a new 52-week low, then rallied at least 2% the next day and at least 1.0% the day after that. These instances marked the very end of the 1970, 1987 and 2002 bear markets. It wasn't perfect, though, as it led to some further short-term losses in 1962 and pretty much flat-out failed in 1973. For those curious, the dates were 05/31/62, 05/28/70, 12/07/73, 10/21/87, 12/08/87 and 10/11/02.

Yesterday we took a look at Crude Oil, and its propensity to see further weakness when it suffers a major one-day decline after being near a new high. The commodity is down another several percent today, marking three straight days of at least 2% declines. The last time Oil suffered this fate was in early September 2005, after which it bounced around for a month before declining steadily for another two months.

The only other time I can find that such a thing occurred so near a yearly high was late September 2000, which again led to an exceptionally volatile couple of months before a year-long decline set in. Neither time did Oil trade back above its previous high over the next few months, even during the volatile initial swings.

Over the past three months, there has been a strong negative correlation between the daily moves in Oil and the S&P, and I suspect a further drop in the commodity would help stocks more than hurt.

Normally after a couple of days like we've seen, I'd have a long list of potential research topics, but I'm not finding that here. We're not seeing much in the way of extremes in breadth or most of our sentiment indicators. Price-wise, we do have the two-day follow-through pattern I noted earlier but other than that I'm not seeing much either.

The action in the Bank sector is obviously notable, but we're so much in uncharted territory there that we really have no precedents. Based on general market behavior after severe oversold conditions and violent snapbacks, I would have to conclude that the action is bullish for the sector and market as a whole, but I have little in the way of precedent to back it up in that sector specifically.

Our short-term guides continue to be very stretched into overbought territory, and so far stocks have been able to hold well. That's an encouraging sign for the intermediate-term, but by no means an all-clear just yet. We should be seeing a heavier positive skew in breadth and volume at this point, which is about the only complaint I have about this move.

Increasingly, I'm looking for choppier back-and-forth trading for the coming days, especially if the S&P happens to make a push towards 1275ish. I'm not ready to bet against the rally on a trading basis despite the short-term overbought readings, considering how oversold we were just two days ago. But if we get a narrow-range day or two heading into next week, I'll reconsider that prospect.

Short-term Readings Getting Stretched

07/17/08 10:05 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Thursday morning...We begin the day with some follow-through to yesterday's surge, with financials once again leading the charge.

On Tuesday, we discussed a couple of measures that suggested the downside risk was beginning to lessen. We were finally seeing some spikes in panic indicators that had been lacking throughout the entire decline from the May peak, and which have had a good record at highlighting the imminent exhaustion of selling pressure.

Yesterday's gains helped to reinforce that view, as the rally was led by the Banking sector which put in its largest one-day gain in the history of the BKX Index or S&P Banks Index, going back 15 to 19 years. We're obviously in uncharted territory there, but generally such extreme moves out of deeply, deeply oversold conditions tend to persist.

I don't have much to add besides what we went over yesterday afternoon. Everything I've looked at supports what we've already gone over - there could/should be some backing-and-filling over the next one to two weeks, but generally this kind of push out of as severe oversold conditions as we've seen has led to higher prices going forward.

Our short-term guides are becoming stretched at this point, and that has been a tough hurdle for the market to overcome, even during strong up-trends. About the only exception is when we're emerging from an oversold intermediate-term low, then we'll often see stocks power right through these kinds of readings without much of a pause. I like to view these short-term readings as a good test of the willingness of buyers to pursue higher prices - if we keep rising, it's a very good sign for the intermediate-term.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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