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WEDNESDAY, MARCH 11, 2009

 

Short-Term Outlook

Since Mar 11, SPX 726

Long-Term Outlook

Since Mar 5, SPX 696

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A Day Of Records

03/11/09 9:00 AM EST

 

Good Wednesday morning...We begin the day with some follow-through buying interest in the pre-market futures as traders try to figure out just what, if anything, Tuesday's recovery may mean.

 

Yesterday was interesting for a lot of reasons, not the least of which was the constant bickering between the few prominent (for better or worse) bears-turned-bulls versus the significantly larger "just another bear market rally" crowd.  Good entertainment, not much information.

 

If we put aside our biases and assumptions, and just look at the facts, then it's clear that yesterday was different.  Here are three reasons:

 

 

Your quote vendor's data will most assuredly be different than mine, but it doesn't really matter as long as you use the same vendor for current and historical comparisons.  I primarily use eSignal data, and I cross-check it against Reuters and Bloomberg when something outstanding occurs.

 

The charts above are taken with eSignal data, and they show that on at least three measures of buying interest, yesterday set all-time records in the NYSE Closing TICK, the NYSE Advance/Decline figure, and total composite Up Volume in NYSE-listed shares.

 

I already know what the counter-argument is going to be..."the sharpest rallies occur in bear markets".  We've gone over that cliché many times on the site, and it's mostly true - but only because declines are greater too.  Volatility, both up and down, is higher during bear markets.  Do monster one-day rallies during bull markets?  No.  Do they happen at the beginning of bull markets?  Yes, sometimes.

 

This was the first time since August 13, 1982 (the kick-off to the greatest bull market in history) when the S&P closed at a new 52-week low, then rallied enough to close above its five prior days' closes.

 

Here are the others:

 

There was only one other bear-market bottom among them, in 1942.  My point is not to suggest that we've now embarked on a new bull market.  Could be, but I don't have enough data pointing that way.

 

We do have enough data, however, to suggest that something changed yesterday.  The level of buying interest was unprecedented on a number of different levels, and when we see that coming out of the conditions like we've outlined over the past week and a half, then it would be exceptionally rare to not see higher prices over the intermediate-term of one to three months - even assuming the worst case that we continue to be mired in a market comparable to the early 1930's.

 

Bottom line - Intermediate-term

 

Coming into last week, we went over a number of indicators and studies that suggested we were very likely within days of an inflection point.  By Tuesday and Wednesday, we had a good-looking setup - sentiment had reached an extreme (the setup) and the price pattern coincided almost perfectly with past lows (the trigger).

 

The market failed to follow through immediately, instead continually flirting with that 681 area that marked last Tuesday's late afternoon low in the futures.  Despite intraday forays under that level, both Thursday and Friday closed above it.  We dropped just below it at Monday's close, but now we've closed back above yet again.

 

This is a messy pattern, but still basically within the confines of the risk parameters mentioned in past studies.  From here, we really do need to see some short-term follow-through.  In the table above with the other "blast off" days, the S&P was higher 3 days later 7 of the 8 times by an average of +3.8%.

 

I continue to feel that based on everything we've discussed over the past two weeks, we have reached that inflection point and will see higher prices over the coming month(s).  My take going into yesterday morning that maximum risk was down towards the 640-660 area, but after yesterday we should not see a lower low from here, beyond Monday's low of 666, especially more than for one or perhaps two days.

 

Bottom line - Short-term

 

Yesterday morning I mentioned that if we set a higher intraday high after the first hour of trading, then we should see a higher close and a push towards 700-720 on the S&P.  On the blog and real-time Twitter notes, we confirmed the trend-day pattern and the markets followed through well on that.

 

With such a large push in the indices, it's not a surprise that our most sensitive guides are now overbought.  I'm most concerned about the STEM.MR Models for the S&P and NDX, which have just entered their "excessive optimism" zones.  Stocks have had an exceptionally tough time sustaining any further gains when the models are overbought.  While both of them could travel a bit more, perhaps another day at most, before becoming "maximum" overbought, when they enter red-line territory like this I start to become nervous.

 

In addition, since the bear market began, there have been five times that the S&P rose at least +3% one day, then gapped up at least +1% the next morning.  Buying that open and holding for three days led to 4 negative returns out of 5 instances, with an average of -2.8%.  The failures traveled an average of +1.7% before rolling over.

 

If we can hold this morning's gap and power a bit higher today, then I do think we're going to run into trouble by 740, which marks the breakdown area from the beginning of this month.  The first test of a breakout/breakdown area tends to get repelled, and since we would be "maximum" short-term overbought at the time, that would be a very tough nut for the bulls to crack.

 

So this turns out to be probably the biggest test yet for the bulls.  If they are able to follow through like the 8 other "blast off" days mentioned above, in spite of short-term indicators that could soon be maximum overbought, then that would be the biggest change of character we've seen during this bear market.  It would be the best confirmation we could possibly ask for that we have still-higher prices to come over the coming weeks and perhaps months.

 

All the best,

 

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

 

 

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