Snapshot Notes - June 23, 2008


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WEDNESDAY, JULY 23, 2008

Not-Great Breadth Is About The Only Worry

07/23/08 9:20 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Wednesday morning...We begin the day with another bump up in the pre-market futures. The news and earnings flow has been mostly positive, Oil is backing off and continuing the topping patterns we discussed last week, and foreign markets were very strong with 1% and 2% gains almost across the board.

Over the past week, we've gone over several studies that suggested higher prices ahead in the intermediate-term. From a spike in panic readings last Tuesday to multiple 1% up days coming out of a 52-week low to heavy volume on a big up day, what we've seen so far has almost been a classic recovery.

I say "almost" because the one thing we have not seen is a day with ridiculously lopsided positive breadth and up/down volume numbers. I've touched on this several times over the past week, and it continues to nag me.

I went back to 1965 and looked for any time the market was in a similar situation to now. Basically, I wanted to find times when the market was oversold (meaning it had a 10-day Up Issues Ratio less than 45%), then put together a string of 1% up days in the S&P 500 (meaning at least three days with 1% gains within one week).

I then separated those rallies into "good breadth" ones and "bad breadth" ones. The good kids were the ones where we saw at least one day with an Up Issues Ratio greater than 75% during the prior week. The bad seeds were the ones where we did not see any kind of big positive breadth day despite the multiple 1% gains.

The table below shows the dates and forward performance in the S&P after the good breadth rallies.

The results were fairly impressive. From the short-term through the intermediate-term, the S&P was solidly positive. There is nothing great among the numbers, it's actually less skewed than most of the studies we looked at during the past week, but we're also now coming out of a more oversold condition than we were during most of the times in this table.

Now let's look at the bad breadth rallies:

This is what troubles me. In the short-term at least, the S&P had difficulty holding on to the 1% gains when breadth never showed a big positive surge. The last few times we've seen this, all led to failed rallies during the last bear market.

Strangely enough, the three-month results were actually more positive than the "good breadth" rallies in the first table, probably owing to the fact that these "bad breadth" rallies tended to fail in the short-term and lead to even-more-oversold conditions.

Also causing me a bit of a pause again in the short-term is our Short-term Indicator Score, which almost made an all-time extreme as of yesterday's close. At 19%, we're now seeing the most-stretched reading since March 2000. That month has bad connotations, but I'm not reading anything that sinister into it. In fact, it could actually be a positive longer-term sign that we're seeing this kind of buying interest coming out of such oversold longer-term conditions, and haven't backed off much from the prior round of short-term overbought readings.

But as far as new positions go, I find it extremely difficult to try buying into these kinds of conditions, even given that I'm positive on the intermediate-term. As the indices bump up against possible resistance levels (1280 on the S&P 500, 12000 on the DJIA and 720 on the Russell 2000), and we see these kinds of short-term readings, aggressive traders may be looking to sell short against those resistance areas looking for at least a temporary rest again.

I'm not quite prepared to do that at this point, but that may change before the day is out if we get closer to those levels on the indices. Again, though, any negativity is based in the short-term only as the one- to three-month time frame has looked quite positive ever since last Tuesday.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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