Uncle Sam Is Rubbing His Hands

04/14/09 9:15 AM EST

Good Tuesday morning...We begin the day with some weakness in the pre-market futures.  They were showing heavy selling pressure until the open of overseas markets, then climbed steadily higher until weak Retail Sales figures were released.

I've been fighting a wicked cold that somehow keeps getting worse instead of better, and I got little to no rest last night so I'm afraid this morning's comment is going to be very abbreviated.

Making matters worse, the love child of Uncle Sam and the Grim Reaper (aka the Internal Revenue Service) is about to receive the bulk of its annual pay in the coming days as U.S. residents send in their yearly dues.

I've touched on the seasonality around tax day in the U.S. a few times over the years, but it hasn't been a big topic because the edge was minimal.  If anything, the market's performance around tax day was in line with general April seasonality, which is quite positive.

I couldn't find any real edge in the days surrounding tax day going back to 1928, using various filters such as whether the market was in an uptrend or downtrend, or whether the previous year had shown large gains or losses (which might, for example, impact selling pressure to pay capital gains taxes).

About the only consistent tendency was some seasonal strength in the week following tax day, as the chart below shows.

The week following tax day was positive 63% of the time since 1928.  Since 1950, that improves to 71%.  Since 1994, that improves even more to 100%...the S&P was up the week following tax day every year since 1994.

If the S&P was down 10% or more the previous tax year, then the week following tax day was positive 10 out of 15 years, including 8 of the last 9. 

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).

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, it's hard to find a solid edge given the battle between the studies (which point higher) and the current status of the indicators (which are neutral to negative for the market).

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-week or multi-month trading range between 850-875 on the upside and 730-760 on the downside.

Bottom line - Short-term

In an intraday update yesterday afternoon, we went over a few reasons why it looked like the S&P 500 would run into some trouble as it traded to 860ish.

When the index was strongly positive before a holiday then followed through the next day, over the next four sessions (marking one trading week from the holiday), the S&P showed a positive return only 1 out of 8 times.

We were also heading into "Turnaround Tuesday".  When the S&P futures have been up three days in a row heading into Tuesday, it was positive that day (Tuesday) only 39% of the time (70 out of 176 occurrences).

Our shortest-term guides still haven't reached a point that I would consider extreme, though the little-bit-longer-term Short-term Indicator Score is fairly stretched.  Probably most troubling is that while it is option expiration week and we can see some crazy readings, the Equity-only Put/Call Ratio closed at its lowest level since September, and the the "smart money" (or at least "smarter money") OEX Put/Call Ratio its highest reading since late January.  I'd consider both to be short-term negatives for equities here.

I've been looking at 850-875ish as the likely top end of an intermediate-term trading range, and was becoming more interested in trying a short trade as the S&P made its way to 860ish.  We peaked just above there yesterday, so we'll see how the next few days turn out.  We've looked at quite a few negatives over the past week, and if they're going to pan out, then this is when they should do so. 

All the best,