Snapshot Notes - July 21, 2008


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MONDAY, JULY 21, 2008

Short-term Is Questionable, But Longer Term Looking Good

07/21/08 9:15 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Monday morning...We begin the day with a modest bump up in the pre-market futures. Commodities are rebounding with Oil trying to ooze back after its huge spill last week, but foreign markets were strong almost across the board, and we also have some not-quite-as-bad-as-feared earnings reports out this morning, and another tally on the mergers-and-acquisitions board.

The Leading Indicators report this morning could be a short-term market mover, but other than that we shouldn't have to worry too much about economic releases until the Durable Goods report on Friday. This week is one of the busiest of the entire earnings season, however, with Apple a focus after the close today. There will be a bevy of financials reporting this week, so it could be another week of substantial pre-market gap opens.

One of the missing pieces of data among our sentiment guides during the June decline was that from the options pits. We weren't seeing any great rush into protective put options, which help investors stem the bleeding from their portfolios. That lack of concern was greatest among the smallest of options traders (those trading 10 contracts or less), who remained neutral throughout much of the carnage.

That changed heading into last week, as they finally began picking up their put buying. That pushed our ROBO Put/Call Ratio to 0.77 - high enough to be considered extreme based on the readings of the past few years, but not quite to the panicky levels we saw in March or during the last bear market, when the ratio moved closer to 1.0 (meaning they were buying just as many protective put options as speculative call options).

So we didn't quite get a true extreme, but one possibly encouraging sign is that last week's reversal didn't change the mood of these guys and gals at all. If they would have switched quickly back to buying call options, then that would have been troubling. But instead last week they bought to open nearly 1.7 million protective put options, which is a new record going back to 2000.

I suppose I could just stop there, leaving off with the exceptional fact that small traders are so pessimistic that last week they bought more puts than during 9/11 or the Enron meltdown or any of our other crises. That would certainly put a bullish spin on things. But I don't like to do that, so it's important to note that they also bought a lot of speculative call options - the 9th-heaviest amount in the past eight years.

It's better to look at these numbers as percentages of total volume, and when we do that we see that their call buying took up 33% of their volume, while put buying occupied 25%. That's unchanged from the prior week, and both are relatively good signs of a dampened sense of optimism among these traders. The fact that they bought a record amount of put options is seemingly notable, but put into the context of total volume, it isn't quite as notable as one would think.

Beginning last Tuesday, we had the occasion to go over several data points that suggested higher prices were imminent. That was a welcome change from what we had seen throughout the decline of the previous six or so weeks - sentiment had been getting increasingly dour, but we had not yet seen any true signs of panic that would allow us to better judge the risk/reward of a possible bounce. We finally saw that on Tuesday, and so far the market has done a decent job of following through.

We haven't yet seen the ridiculously lopsided advance/decline or up/down volume figures to the upside that we often see coming out of severely oversold intermediate-term conditions, so that is one relatively minor concern, but we have seen unbelievable volume (which we showed on Friday has been an excellent buy signal in the past). We've also seen a couple of very solid up days on the S&P 500 and an explosive rally in the Banking sector, both of which have a habit of showing up near intermediate-term lows as we discussed last week.

So the one-to three-month time frame is looking brighter than it has since March, even without the hugely positive breadth figures that so far have gone missing. On a (much) shorter-term basis, on Friday I went over a tendency in the S&P to back off after seeing consecutive 1% up days then a gap up open like we got on Friday. That tendency was very consistent, with the market backing off 10 out of 11 times (and the one gainer was just barely so).

Today is also the day after option expiration, and when the S&P gapped up 0.25% or more on these days, it has closed the day higher than the open only 40% of the time (22 out of 55 times) since 1995.

Because of tendencies like those, I turned neutral to slightly negative at Friday's open and that's still the case. I'm not too keen on betting aggressively against this rally due to the type of stats we went over last week, and if this is the beginning stage of an intermediate-term rally, then the market could (and probably should) blow right through any short-term overbought readings and negative seasonal or price-based biases.

If we see the market hold or add to its gains during the next couple of days, then I will become even more interested in adding even more aggressively to longer-term long positions at the next good-looking opportunity.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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