Snapshot Notes - July 22, 2008


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TUESDAY, JULY 22, 2008

Sector Divergences And Small Closing Ranges

07/22/08 2:55 PM EST

As of:

SPX 1251

HELP ARCHIVE

It's a battle of the sectors today, and depending on which one you're involved in, you could be having either a really good or really bad day.

With the XBD Broker/Dealer Index up more than 3% and the SOXX Semiconductor Index down more than 5%, there is a divergence there unlike most we've seen over the years.

I checked for any time since 1993 that Brokers were up 3% or more while Semis were down 3% or more on the same day. Interestingly, it led to weakness in the broader market more often than not, at least in the very short-term of the next couple of days.

The S&P 500 was positive only 1 out of 7 times and showed an average return of -1.1%. The Nasdaq 100 was up 4 of those times but had a worse average return of -1.6% due to its more-volatile nature. The XBD index sported some mean-reversion and was positive only 2 times with an average of -0.9% while Semis rebounded 4 times but showed an average of -1.1%.

So there wasn't much to glean for the short-term other than general, fairly inconsistent weakness across the board. Looking out a bit longer - two weeks - we see a different story. After ten days, the SOX was up 5 times by an average of +6.4% while the XBD was still positive only 2 times with an average of -1.6%. The S&P was up 4 of 7 with a flat return and the NDX was up 5 times with an average of +1.8%.

Overall, we have a fairly limited sample but generally this kind of extreme divergence among two important sectors led to broadly weaker-than-average returns in the very short-term but after that we tended to see some mean-reversion with the positive Brokers falling back while the just-got-hammered Semis bounced back. I don't think this is quite good enough for a pairs trade, but it's something to look for if participating in those sectors.

Other than that, there isn't much catching my eye here that's a change from what we've been discussing. The short-term negatives we went over during the past couple of days have pretty much already been worked out without much of a pullback in prices, and certainly nothing sustained, at least in the S&P 500.

We haven't gone anywhere on a closing basis for three days (assuming we close about where we are now), with the S&P 500 within a few points of where it closed on Thursday, as it has been for the past two days. I checked for any time in the past 58 years that the S&P scored consecutive 1% up days, then closed the next three sessions within 0.25% of the close of the second big up day. It's only happened four times (06/15/56, 03/31/70, 01/02/74 and 02/20/87), with no common theme among them that I could find and would consider to be an edge.

I consider this type of behavior to be a positive, as it's at least a change in character from what we've seen for most of this year. This is certainly the first time since the May high that the market has been able to hold in the face of the kind of short-term overbought readings that we hit entering this week, and typically that's a very good sign of sustained buying demand that leads to rising prices over the coming weeks.

Given the other factors we've gone over during the past week, I think the picture still looks pretty bright on a one- to three-month time frame and see nothing in this activity to change that view. Shorter-term, I don't see much of an edge either way. Given what we've discussed, I can see the possibility of this run continuing after the consolidation of the past couple of days, but I'm not much of a momentum trader, particularly on the long side during a bear market. As for entering new longs on a trading basis, I need to see more of a pullback than what we've been handed so far.

Short-term Wiggles Getting Worked Out

07/22/08 9:15 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Tuesday morning...We begin the day with some weakness in the pre-market futures as traders got hit with a tidal wave of disappointing earnings and outlooks after the close yesterday. Commodities are mixed with Oil pulling back, and foreign markets were mostly weak. There isn't much of note on the economic calendar today, so the main focus will be the digestion of all the tech and financial earnings reports.

Over the past couple of days, we've discussed a couple of price patterns that suggested we'd likely see a short-term pause after the strong rebound off the lows mid-week last week. When we gap up after consecutive 1% up days, and gap up following an options expiration, prices tend to back off. In combination with other short-term indicators just coming out of overbought territory, it seemed like continued upside would be a struggle.

The market has held up well in spite of those minor negatives, though this morning we're getting a bit of a hit. The short-term studies we went over were just that, and don't project any edge beyond a day or two, so any weakness we see today would help to satisfy those biases.

Longer-term, I've seen enough positive that I want to be looking for the next opportune long-side setup. We haven't seen a "perfect" low similar to last March where we had a plethora of panic readings on an historic scale, followed by multiple days of clear buying thrusts, but still what we have seen is still intriguing.

Last Tuesday we went over two solid reasons to expect imminently higher prices, then we got back-to-back large gains and heavy volume on an up day. A study we went over on Friday that looked at previous instances of big gains on exceptionally heavy volume was extremely bullish, especially in the intermediate- to long-term.

This short-term shakeout will help to alleviate the minor negatives we'd discussed, and now my focus will switch to looking for another decent-looking spot to try to take advantage of the studies we've gone over during the past week. I'm a little bothered that we didn't quite reach typical bear-market extremes near the lows, and a little bothered that we have not seen extremely positive advance/decline or up/down volume figures coming out of the low, but for now I'm giving the rally the benefit of the doubt and operating under the assumption that we've reached another temporary low in a (possibly) ongoing bear market.

The only thing that will change my strategy at this point is a move to new lows that holds for more than a day or so. As we went over last week, with the full force of earnings season upon us, we should see quite a few violent whipsaws, but I'm not seeing much yet that calls the rally into question.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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