Snapshot Notes - July 31, 2008


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THURSDAY, JULY 31, 2008

Seasonality Is Tapering Off, Otherwise Not Much Edge

07/31/08 3:20 PM EST

As of:

SPX 1251

HELP ARCHIVE

I don't like to make too much out of seasonality. In the broader stock market, it's usually little more than a (very) gentle breeze either with us or against us.

For the past few days, I've been mentioning the positive seasonality related to the end of July, and that just happened to carry through again this year. I've also mentioned that any positive bias runs out on the last day of the month, as our Seasonality chart for August shows:

The first two weeks of August have only a couple of green bars (meaning most of the days have averaged a negative return), and the percentage of time the days have been positive are mostly submerged under the zero line.

That's been particularly true recently. Since 1997, the first two weeks of August have been positive in the S&P 500 only 3 out of 11 times with an overall average of -1.1%, and two of the winners were minimal gains of +0.8% and +0.1%. The maximum drawdown (i.e. worst loss during the first two weeks of the month) averaged -3.4% compared to a maximum gain that averaged +1.4%.

The other major equity indices weren't any better, and in fact the small-cap Russell 2000 was up only 1 of those years - the rest averaged a loss of -2.3%, with a maximum risk (-4.4%) that averaged nearly four times the maximum reward (+1.2%).

There were 7 instances since 1950 when the S&P was up 2% or more in the final three days of July. The first three days of August showed a positive return 2 times with an overall average of -1.2%. The two winners were both marginal (well under 1%) and one of them gave back those gains and a whole lot more during the following two weeks.

Whether it's due in part to positive seasonality or not, the broader market has held up exceptionally well the past couple of days, especially today. This morning, we went over the fact that markets tend to reverse an extreme initial move to economic reports, so the recovery from this morning's gap down opening can't be a total surprise to anyone who follows these kinds of biases. We could very well have another opportunity to look at the same thing tomorrow as traders react to the jobs report, which often causes even larger reactions than GDP.

Our shortest-term guides are mostly neutral at this point, and other than moderate negative seasonality (which is always a little questionable as a guide), I see just as little edge here as I did this morning. I know people like to see conviction, whether right or wrong, but at the moment I have none either way when looking at the next few sessions.

On an intermediate-term basis, things are still progressing well, and the continued hold above 1280 on the S&P is giving us a good chance to finally put together a string of higher highs and higher lows, coming out of severely oversold conditions, for the first time in a year. Unless the recent lows are broken and held below for more than a day or so, I'm continuing with the idea that we'll see more of a recovery in the one- to three-month time frame.

Short-term Looks Like A Toss-up

07/31/08 9:15 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Thursday morning...We begin the day with a large gap down in the major equity averages as the morning economic reports did not paint a pretty picture. Commodities are mixed to positive with Oil bouncing off its lows of the morning and foreign markets are modestly weak. We also have the important jobs report due tomorrow morning before the open, which will be another market-mover.

On Tuesday morning, we took a look at a handful of short-term guides that are a good cross-section of the ones we follow on the site. At the time, they were making the case that we were seeing the first decent long-side opportunity in weeks, as the market was oversold on support. It didn't seem like a particularly strong edge, but the buyers have obviously taken full advantage.

Let's see how they look now after consecutive days of 1.5% or greater gains in the S&P 500:

The long-term technical setup isn't going to change much in just two days, but for the first time since the October high, the S&P has a chance to put in a series of higher highs and higher lows. That isn't a fool-proof indication of a major trend-change, but it would certainly be a change in character from what we've seen over the past year, and coming off the panic readings from a couple of weeks ago, it would further aid the intermediate-term outlook.

The only other indicator of note is the Down Pressure indicator. This looks at the percentage of stocks in the S&P 500 that closed up or down in a given day, and also the percentage of total points that the losing stocks lost (compared to total points gained or lost). When this drops under 30% over a three-day period, it has consistently led to poor market performance going forward.

Because it's a three-day average, we're going to be dropping off Tuesday's reading at today's close. If we have a neutral or up day today, this indicator will likely push well into overbought territory, which is a trouble-spot. Other than that, the others are pretty neutral and not suggestive of anything in particular.

At the moment, it doesn't look like the chances of an up day are very high given the big gap down we're facing. I can find only two instances since 1993 when the S&P 500 gapped down 0.5% or more on the heels of an advanced GDP report (April 1997 and January 2008). The index recovered into the close both times.

If we just look for any gap down, and not necessarily one as large as we're getting this morning, then the S&P moved higher into the close 75% of the time (12 out of 16 attempts) by an average of +0.7%. After that, results were in line with random. That helps reinforce something we've discussed time and again over the years - extreme reactions to economic releases tend to be an effective contrary indicator in the very short-term.

I mentioned yesterday that given the already-stretched nature of the intraday Cumulative TICK and Price Oscillator, a further push higher in stocks after the gap up opening would likely move the STEM.MR Models into "excessive optimism" territory. That usually signals that the gains will be given back in the coming sessions. Everything was going according to plan, as the extra morning push moved the models into overbought territory, and the indices backed off markedly from their early highs.

That didn't last long, though, as just as the indices looked like they were on the verge of breaking down, substantial buying pressure came in and took us to new highs on the day right into the close (I'm not a conspiracy theorist, so I couldn't care less if the buyers were "natural" investors, the Federal Reserve, or aliens - it is what it is, just as it always has been). That's an impressive show of strength, and again a change in character. A market that continues to power higher in spite of short-term overbought readings is one which has better odds for gains in the intermediate-term.

My outlook hasn't changed since yesterday - the one- to three-month time frame continues to look solid from the long side, and that will be helped along quite a bit if the S&P is able to overtake and hold above last week's high (I'm using 1280 as a general level). Short-term, we have a mix of overbought readings, but ironically not as much of a confluence or extremes as we did yesterday before the afternoon run-up. Quite frankly, I'm not at all sure what to expect in the short-term - the market has a tendency to reverse from large gap opens on the heels of economic reports, and we still have some mildly positive seasonality here, but this morning's batch was a pretty negative surprise, and a case could be made that we're still overbought. As far as I'm concerned, the short-term is a coin flip.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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