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Short-term
Outlook:
Short-term Strategy
What: We will remain neutral
for now.
Why: With the equity indexes bouncing around
within a trading range and most of our measures not throwing
off any directional bias, the best bet appears to be staying
on the sidelines, unless one wants to simply attempt to buy
at support and sell at resistance. We're bumping up
against the latter now as the futures are indicated to open
near the upper end of the recent range. Other than a
couple of brief pokes a few points above, the 1110 area on
the S&P has served as a solid ceiling since mid-November, so
that's the big focus today. With few "excessive
optimism" readings at the moment, seasonality that's about
to turn quite positive and the breakout stats given below,
trying to fight a breakout to new highs seems futile unless
we get something like the "gap and crap" from December 4th.
Sentiment:
Trend:
Most of our short-term guides are neutral. Still in the
1085 - 1110 range. Support/Resistance:
Other Tendencies:
Resistance
at 1110 is just overhead. No edge is present.
Intermediate-term Outlook:
Intermediate-term Strategy
What: We will remain neutral for now.
Why:
In March,
we discussed a large number of reasons to expect an imminent rally
of one to three months' duration, or perhaps even more.
We've had ample opportunity to discuss the historic
momentum since that low, and have seen little reason
since to expect anything other than short-term
corrections. In
late October, we looked at
some "toppy" kinds of studies, and multiple
failures to hold the 1100-1110 breakout area are another
warning sign. This is especially the case after we've
seen a
surge in
speculative activity, which has continued during the
first week of December. Unless the S&P breaks major
support, however (which we're using at 1065), we can't find
much reason to be bearish.
Sentiment:
Trend:
Smart/Dumb Confidence Spread is neutral.
The S&P has a rising 200-day average and a series of
higher highs/higher lows. Support/Resistance:
Other Tendencies:
Resistance is still tough
near 1110, but there are multiple layers of support under the major
equity indexes. Pullbacks after highs
have been positive, but we've seen some "toppy"
kind of behavior.
Equity Indicators - Updates and Extremes
Weekly data
compiled by AMG Data (now renamed to Lipper) shows that investors pulled
$1.5 billion from equity mutual funds in the latest week, while taxable
bond funds scored yet another week of inflows (for the 39th consecutive
week).
The outflow from equity funds isn't large historically - we saw many
weeks with outflows greater than $5 billion last year - but it is large
relative to others lately. This week's outflow was the 2nd-largest
we've seen since the March bottom, eclipsed only by the first week in
October as the market was bottoming then.
Before we get all bullish about the contrary aspects of this, however,
there is a big caveat...seasonality. We often see regular inflows
during January, and heavy outflows during December. In fact, the
largest one-week outflows in 2005, 2006 and 2007 all occurred during
either the first or second week of December (2008's early December
outflow was only eclipsed by the panic weeks in September and October).
So we can't rely too much on this as a measure of sentiment as opposed
to a seasonal reflection of likely tax-related selling.
Breakout/Breakdown From The Trading Range
OK, this isn't exactly a sentiment indicator, but I wanted to touch on
the recent trading range, because the lack of directional movement has
had a big impact on extremes (or lack thereof) in our indicators.
In the past, we've often discussed that the first move out of a
volatility coil is a "false" move that then sees a larger and more
prolonged move in the exact opposite direction. But the range over
the past month has been so tight, and so sustained - especially with the
S&P flirting with a new one-year high - that I wanted to re-test it
given those parameters.
The dates
below show every time over the past 80 years that the S&P formed such a
tight range. What we're looking at are those times that: 1. The
difference between the highest and lowest close over the past month is
less than 2 times the Average True Range. The tables show
the performance in the S&P after it broke to the upside and downside
from the trading range. What we see are
that when it breaks to the upside, it has a tendency to follow through
in the short-term, as it was positive 77% of the time. And we can
also see from the thumbnail charts that most of the instances saw a
positive reaction during the following month. Breakdowns,
however, weren't as kind. The S&P was up after a week barely 40%
of the time, and while it managed to claw higher about half the time
over the next month, overall the reactions were muted. This doesn't
seem to be an exceptionally strong edge, as there is quite a bit
of variability among the precedents. But traders seem to assume
that whichever way the range breaks is automatically going to seal our
short- and intermediate-term fate. From these results, I would say
that we have a better chance of trading in the direction of the break,
but mostly in the short-term.
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Equity Market Indicators
Notes: Corporate insiders, equity index futures positions (primarily in the Nasdaq 100) and the various sentiment surveys continue to be the more worrisome indicators among the broad groups that we follow. Most of the others are either neutral or slightly bearish (for the market).
Among individual indicators, we continue to watch most closely for scenarios where 0% are bullish and 30% or more are bearish, which has been a very consistent predictor of imminent short-term weakness since March.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Nothing notable for today.
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For December
11, 2009
Neutral As of Dec 4,
1115
SPX
