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Short-term
Outlook:
Short-term Strategy
What: We will go 25% Bearish if the S&P 500
opens in positive territory, then trades below 1114.
Why: From 1950-1986, the S&P rallied between
now and the last day of the year 94% of the time.
Since then, though, it rallied only 52% of the time, and was
negative 3 of the past 4 years (close to being 5 of the last
7 years). While the next two days (immediately
before Christmas) have still been up 70% of the time,
positive seasonality is not a lock for bulls into the end of
the year. So I'm not eager to sell into rising prices
just yet (especially when the index is at new highs), but we
will move to a small bearish position if we see a downside
intraday reversal. The main reason for that is
discussed below related to the Indicators At Extremes and
the Total Put/Call Ratio. The main concern with trying
shorts right here, besides the obvious uptrend, is that
seasonality may delay any meaningful downside for a couple
of days.
Sentiment:
Trend:
Big spread in the Indicators At Extremes. All short-term
trends are positive. Sup / Res:
Other:
Breaking to new highs, not
much resistance above. Positive seasonality ahead of
Christmas.
Intermediate-term Outlook:
Intermediate-term Strategy
What: We will remain neutral.
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.
The rally exceeded all kinds of expectations, and on an
intermediate-term time frame we haven't seen too many
reasons to expect an imminent end. There have been
some signs of a
surge in
speculative activity, but that has only led to
short-term dips. Until we see more signs of outright
and excessive speculation across the broad spectrum of
measures we follow, and/or a technical breakdown in the
market, we can't spot many reasons to fight the uptrend just
yet. That may change during the seasonally weak middle
of January, but for now higher prices get the benefit of the
doubt.
Sentiment:
Trend:
Smart/Dumb Confidence is neutral.
Rrising 200-day avg;
higher highs/higher lows. Sup / Res:
Other:
Trading at new highs. Nothing notable.
Equity Indicators - Updates and Extremes
For the past
several weeks, we've kept repeating a certain paragraph in the Notes
section of the Equity Market Indicators (see below). That note was
that we're watching closely for a time when 0% of our indicators were
bullish for the market, and 30% or more were bearish.
There's nothing magical about those numbers, but since the March low
there has been a consistent tendency for equities to form a short-term
peak almost immediately after we've seen that kind of spread. We
have that now.
Since March, there have been 9 days that we've seen this (a couple were
bunched together, so there were 6 unique instances), and every time it
coincided with a period where stocks were not able to sustain any
further upside momentum.
Out of the 9 days, a week later the S&P was negative all 9 times,
averaging a return of -1.6%. The maximum gain that the index
managed to enjoy during those week-long trades averaged +0.9%, while the
average drawdown (i.e. worst loss) averaged -2.7%.
It would be dangerous to get too carried away by data-mining the past
instances and looking for triggers, but it's perhaps notable that soon
after each of the prior cases, the S&P suffered a day where the close
was nearly 1% (or more) below the day's open, most often with that day
occurring on a gap up (a sign of buying exhaustion). That's
something to look for here as well.
Here are the dates: May-06, May-08, Jun-01, Jun-11, Aug-07,
Sep-16, Sep-17, Sep-21, Oct-16.
Yesterday we
highlighted the Total Put/Call Ratio. In a rare development, we
get to show it again today.
It isn't all that uncommon for a measure like this to hit an extreme.
It is unusual to see it remain extreme for two consecutive days.
For example, there were 170 sessions when the put/call ratio moved more
than 25% away from its six-month average. But there were only 42
when it happened on back-to-back days.
Going back to 1994, over the next three days the S&P 500 showed a
positive return only 28% of the time, and sported an average return of
-0.6%. Its average risk over that three days (-1.9%) was more than
twice as large as the average reward (+0.9%).
There were only two cases when the S&P managed to rise substantially
(say more than +1%) and not give back the gains 2 to 5 days later.
That was in late December 1998 and mid-March of this year when we were
getting all of those screwy put/call readings.
Adding even more worry to this indicator, the Total Put/Call Ratio
actually closed higher than the Equity Put/Call Ratio. This is
exceptionally rare, occurring only 13 times in the past 15 years.
Over the next three sessions following those, the S&P managed a gain
only 23% of the time, and had an average return of -1.0%. The last
8 occurrences, dating back to 2002, were all negative.
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Equity Market Indicators
Notes: For several weeks, we've been watching for a day where 0% of our indicators were bullish (for the market) while 30% or more were bearish. We have that again as of December 22nd.
The reason we've been watching for this is that every time it has occurred since the March bottom, stocks entered a short-term corrective phase. While seasonality and extremely low volume may impact this instance, it's certainly a cause for (short-term) concern.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Nothing notable for today.
Jason Goepfert Founder, Sundial Capital Research, Inc.
Forwarding or other distribution of this email is prohibited without the express permission of Sundial Capital Research, Inc. If you do not possess a firm-wide license, then forwarding this message will violate your subscription agreement.
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For
December 23, 2009
Neutral As of Dec 17,
1098
SPX
