THURSDAY, APRIL 9, 2009
Insiders In "High Def"
04/09/09 8:50 AM EST
Good Thursday morning...We begin the day with what was indicated to be a flat open until some positive news from Wells Fargo and Wal-Mart lifted us about 1.5%. Ahh, the joys of earnings season.
When TV production began shooting in high definition a few years ago, a collective scream arose from actors and actresses. Soap opera stars in particular were in a tizzy, since the new format would allow all of us to see that they, too, suffer blemishes, split ends and even (gasp!) wrinkles.
We don't have the same kind of high def filter for our indicators, but often if we zoom in or zoom out from the traditional view, we can get a wholly different perspective than we did before. When we do that with corporate insider behavior, it probably won't generate the same kind of scream heard from the soap stars, but it might at least cause a raised eyebrow or two.
Back on March 12th, one of the multitude of reasons we discussed to look for higher prices in the intermediate-term was the buying interest exhibited by corporate insiders. If those folks were confident enough in at least a temporary recovery to be buying so aggressively, then it looked like a pretty decent bet for us too.
The latest update from InsiderScore.com shows that the ratio of buying to selling pressure has dried up considerably, and is back within the trading bands that we put around the ratio. Not too extreme either way.
Comparing the current ratio to its level in, say, 2005 - a whole different world in terms of market environment - may not be so appropriate. So now let's zoom in on the most recent behavior of this group of "smart money", only looking at the bear market.
When we do that, it doesn't look quite as innocuous as it did in the first chart.
When the score has reached its current level, the average one-month forward return in the S&P 500 was -6.2%. The average three-month return was a sickening -11.4% with an average drawdown (i.e. worst loss during the trade) of a woeful -15.7% compared to an average maximum gain of only +2.4%.
Bottom line - Intermediate-term
Beginning in early March, we discussed a large number of reasons to expect another imminent rally of one to three months' duration. Some of those studies were even more positive, and suggested not just a rally, but possibly a new bull market. The behavior we saw early last month was reminiscent, on a number of levels, to the ends of prior bear markets.
After the 20%+ rally, our current juncture is somewhat similar to where we were in January of this year. At that point, we'd gone over a number of studies in late November and early December that suggested the possibility of a longer-term advance. But our indicators had become stretched to "caution" territory, and the market fell apart almost immediately thereafter.
We're faced with something similar now. On the one hand, we have a number of studies based on past behavior that suggest more upside to come. On the other hand, we have things like the Indicator Score, Dumb Money Confidence and other potential roadblocks like we discussed this week (see here and here).
So which do we trust more - the studies from a month ago that have so far proven to be accurate, or the current indicators that are at levels that consistently forecasted prior bear-market declines?
The market so far has held up well in spite of some shorter-term overbought conditions and other situations when it rolled over immediately before, so that's a point in favor of further upside. But when looking at our current position objectively, I just don't see a strong edge either way and am moving to neutral.
It's entirely possible that we're in an "April 2003" kind of place and we'll just keep steaming higher as we emerge from the bear market. Personally, I'm not comfortable betting on that, and prefer to back off and look for shorter-term opportunities in what I think will most likely be a multi-month trading range between 850-875 on the upside and 730-760 on the downside.
Bottom line - Short-term
Earlier this week, we were looking at 790-800 as a potential spot for a long trade, particularly if we saw some oversold readings among our most sensitive indicators, due in fairly large part to some positive Good Friday seasonality.
The S&P traded down to 802 early yesterday, but yet another government bailout announcement goosed us higher before the open and now this morning positive outlooks from Wells Fargo and Wal-Mart have fanned the flames again, with the S&P up nearly 40 points from yesterday early lows, and more than +1.5% from yesterday's close.
The day before an exchange holiday tends to see exceptionally low volume and very tight intraday ranges. Not surprisingly, then, there have been only 5 times that the futures gapped up +1% or more the day before a holiday. They closed higher than the open 4 of the 5 times, with an average of +0.4% from the open.
The day following the holiday was up 2 times, down 3, with an overall average of -1.0%. A week after, the S&P was positive only 1 time, and averaged a return of -1.8% with a risk/reward that tilted strongly to the risk side (-3.3% versus +0.6%).
I would normally be more inclined to fade an opening gap like this if it were happening other than the day before an exchange holiday - we just too often see one-side markets on these days. But if we close between 840-850, then I'll likely be looking to carry over at least a small short position over the weekend.
All the best,
President and CEO
Sundial Capital Research, Inc.
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