Long-term Buy Signals: 2; Short-term Sell Signals:  Many

Posted At 8:45 AM EST

Good morning...We begin the day with flat pre-market futures.  There was a lot happening in yesterday's session, some of it extremely rare (see the Short-term Summary below).

The S&P finally did what so many were looking for it to do - trigger a long-term buy signal by finally closing back above its 200-day moving average.  This is a major development for many who consider that average to be a determinant of long-term trend.

Personally, I don't use it that way.  I've found that using the slope of the 200-day is a much better gauge of whether something is in an uptrend or a downtrend.  But that's just me...let's take a look at other times the index has suffered for more than 200 days below its 200-day average, then rejoiced by finally closing back above it.

The just-ended streak was a monstrous 358 days, the 2nd-longest in history.  The only other time the index had to endure more shame ended in August 1932 with a streak of 414 days.  That turned out to be a good buy signal on both a short- and long-term time frame.

Overall, the others were OK but nothing spectacular.  The index performed better than random across every time frame both in terms of consistency and average return, but much of that was due to the instances in the early part of last century.  It's a positive sign for the market, I guess, but I'm not reading a whole lot into it.  A bigger deal for me will be when the slope of the 200-day changes back to positive.

Another buy signal getting a lot of press is the one from something called the Coppock Curve, which was presented to Barron's in 1962 by a gentleman by the name of Edwin Coppock.  It's basically a (very) long-term look at the momentum of the market (just type "Coppock Curve" into any search engine to get a wealth of background info).

My friend Dan Fitzpatrick did a great segment on Fast Money about it last night.  It's not easy to explain an esoteric technical indicator...on sound bite-heavy television...to a group of skeptical hosts.  But like a good teacher does, he explained that when the Coppock Curve hooks, it's like turning around an ocean liner, which is a perfectly apt description.  You don't want to be buying options based on something like this - it's best used with a 3- to 5-year time frame.

It's hard to see how the gyrations of the indicator coincided with those of the S&P, so let's zoom in on the last 45 years since the indicator was made public.

Since 1928, there have been 23 buy signals from the indicator.  For a buy signal, I required that the Curve drop below 0 to at least a one-year low, then it sported a higher reading than the month before it.  Not too strict at all.

On a very long-term time frame, these signals did well, though not exceptionally better than random.  They were perfect over a 5-year time frame, but even with a 3-year perspective they went 10 for 11 since publication date.

I'm usually more interested in risk vs. reward as opposed to average return, so when we look at the following year, reward outweighed risk by 3-to-1 (+23.2% versus -7.3%); over three years it was 5-to-1 (+45.2% versus -9.9%); and over five years by 6-to-1 (+72.6% versus -12.3%).

This is best used as a stock market indicator.  Its record with things like Gold, Crude Oil, Bond Yields or the Dollar are considerably less stellar.

Combined with long-term buy signals like the flow of retail money market funds and the return of consumer confidence, bulls do seem to be gathering some solid evidence that this is not your typical bear market rally.

Bottom line - Intermediate-term Outlook:  Neutral  (since April 9, SPX 843)

Beginning in early March, we discussed a large number of reasons to expect an 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.

During mid-April, several of our measures like the Indicator Score and Dumb Money Confidence reached levels that usually result in either a flattening out of the price rally, or an outright decline, especially during a bear market.

But the market held up extremely well in spite of some of these overbought types of indications.  This is very rare during an ongoing bear market, and is important to keep in mind especially given many of the "this time is different" kinds of studies we reiterated in early May.

The S&P 500 broke out over 875 a few weeks ago, and has since re-tested that breakout level twice, holding firmly both times.  This makes it exceptionally hard to find anything "wrong" with the rally so far.  Some preliminary uptrend lines were broken earlier this month, showing a slow-down in the trend, and there is a possibility of forming a double top if we break below 875ish (which would project down to about 830).  But unless that happens, trying to bet against this rally is a tough row to hoe.

On Friday we looked at how the market typically reacts coming out of an extremely tight multi-week range.  Usually it breaks lower first, but even more consistently the first move tends to be a "false" one, with an upside breakout leading to more weakness than strength after the initial surge.

Given that and a bevy of technical factors, I've been looking for the S&P to run into trouble if it traded into 940-950, which it accomplished yesterday.  I'm not expecting any kind of waterfall decline to new lows, I'm just looking for more of a pullback than we've seen.  If the index is able to climb and hold above 960-975, I'll have to back off of that idea and kick myself some more for not giving more credence to all those long-term buy signals we've been discussing since early March.

Bottom line - Short-term Outlook:   25% Bearish  (since June 2, SPX 938)

Yesterday's trading triggered a surge in our indicators on the bearish (for the market) side of the ledger.  We now have 0% at a bullish extreme and 32% at a bearish extreme.  There have only been two times during the bear market we've seen this kind of skew - during mid-May and again on August 28th of last year.  Neither were good times to expect further sustained upside.

Three straight days with gains greater than +1.3% in the S&P will tend to generate those kinds of extremes, and there are several we could point to that have consistently led to weakness, or at least choppy trading, going forward.  Click any of the asterisked indicators in the Indicators at Extreme section and you'll get a pretty good idea of what I'm writing about.

It isn't only the extremes that are unusual.  We're also seeing very divergent behavior in a couple of indexes like the BKX Banking Index and the VIX volatility index.

Yesterday was only the second time since 1993 that the S&P was up +2% or more but the BKX Index dropped by -0.5% or more.  The other occurrence was March 4th of this year, after which we took a dip of nearly -5% in the S&P over the next two days before bottoming.

We also saw the VIX jump by nearly +4% yesterday, which is extremely odd given that it is very well inversely correlated to moves in the S&P.  Once again, there was only one other precedent since 1990 that we saw this extreme of a divergence, which was November 27, 2002.  That happened to pinpoint a short- and intermediate-term peak for the S&P.

Our shortest-term guides are modestly overbought after yesterday's session, no surprise there.  Seasonality is positive for one more day (today), then becomes considerably less equity-friendly over the next week.  Since the inception of the S&P 500 futures, buying on the close the 2nd trading day of June and holding for a week resulted in only 35% positive trades, an average return of -0.4% and a maximum reward (+1.2%) whose average was smaller than the average maximum risk (-1.7%).

I was looking for the S&P to hit trouble if it ran into 940-950 either by yesterday's close or this morning's open.  It managed to tick at 947 yesterday before pullback back, so I'm still using this range as a likely (temporary) ceiling, particularly over the next week or so.

All the best,