Snapshot Notes - July 18, 2008


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FRIDAY, JULY 18, 2008

Continued Volume Thrust Makes A Bullish Case

07/18/08 9:45 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Friday morning...We begin the day with a gap up opening in the major indices, as Citigroup's earnings and strong foreign markets helped the futures overcome some late weakness yesterday off of a few disappointing corporate results. This is the roller-coaster we have to deal with during earnings season, and it's why I prefer to call it "gap season".

Over the past few days, we've gone over a few stats related to the panicky conditions we finally saw on Tuesday, then the buying pressure witnessed on Wednesday and Thursday. We can only skin the cat so many ways, and overall the results suggested that the market should continue to generally rise going forward.

I'm going to skin the cat one more time, just because yesterday was so unusual. We saw exceptionally heavy volume on Tuesday as panic began to set in, and as we discussed at the time, that in itself tends to be quite bullish. But yesterday, composite volume on the NYSE and Nasdaq exchanges once again reached over 9 billion shares, which is extremely heavy for an up day in the market.

I went back to 1965 and looked at how heavy volume on relatively big up days during down-trending markets has fared in the past. What I looked for were any 1% gains in the S&P 500 when composite NYSE volume was double its one-year average, and the slope of the 200-day moving average on the S&P was negative. We've looked at this sort of study several times over the past five years, and they have mostly held true.

We can see that the results were quite positive, especially in the intermediate-term. But there were several instances in there with days bunched together, which helps to skew the results somewhat.

So let's clean that up a bit and only look at "unique" occurrences, or those that did not occur within a few days of one another. Deciding which ones to keep and which ones to exclude is a subjective judgment (e.g. some would only include those that occurred after one year of another occurrence), so that's why I included both tables.

Again, very positive results here, some of the most positive we've seen in a study since March.

One thing that troubles me for the short-term is today's gap up opening. I checked the history of the S&P 500 tracking fund, SPY, for any time that fund was up 1% two days in a row, then gapped up at least 0.5% the next morning, as it did today. Buying the open and holding until the next day's close resulted in only 1 winning trade out of 11 attempts going back to 1995, with an overall average return of -0.7%.

That would mean some very short-term weakness here, which would also coincide with the usual post-expiration weakness we see on the Monday following an option expiration. This was a very short-term negative phenomenon, however, and waiting until the following day's close to buy helped the returns become more in line with random.

I mentioned yesterday that while the intermediate-term was becoming brighter due to the panic we saw early in the week, and then the upside follow-through (which today's study helps to confirm), in the short-term I was becoming increasingly worried about a choppy, give-and-take market due to short-term overbought conditions and our approach towards resistance levels in the major indices. Today's gap doesn't help matters in that regard, and I'm pretty neutral to maybe even slightly negative for our prospects over the next couple of sessions. But given what we've gone over this week, if we do pull back then I'll be looking for another opportunity to trade on the long side of the market next week.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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