A Short-term and Long-term Timing Review

Posted At 9:05 AM EST

Good morning...We begin the day with very modest buying interest in the pre-market futures.  The were struggling a bit prior to the jobless claims numbers, which gave a quick shot in the arm.  The Leading Indicators and Philly Fed reports at 10:00am EST could be market-moving if they're far away from expectations +1% and -17.0 respectively.

I don't have a lot to add from what we've already discussed over the past couple of days (we're short-term oversold) or the past couple of weeks (we're coming off intermediate-term signs of excessive speculation).

So I thought it'd be a good time to review a couple of charts we've looked at in the past, where we bunch together some of the more reliable guides on a short-term and intermediate-term basis and see how they compare.

First, the short-term:

When a majority of these indicators reach an extreme at or near the same time, the market typically responds within a day or so.  Generally, when at least three of them reach an extreme, it's time to look for a counter-move over the next 1 - 5 sessions.

What I like about watching these short-term signals is not only that it helps with timing trades, but it also tells us quite a bit about the health of the market.  Failed signals are just as important as those that work.  For example, the inability of the market to rally well off of oversold conditions earlier this year suggested a very weak market that had more work to do on the downside.

Conversely, the market failed to decline after the overbought confluence in March.  This suggested strong buying interest, which usually results in longer-term rising prices, which it did once again.

Currently, most of the indicators are showing excessive pessimism by trading below or near their lower trading bands (the lone exception is the Rydex Beta Chase Index).  This is a solid oversold signal, and should result in a rebound in the coming day(s).  If not, we need to be more concerned about a January/February kind of situation.

Now let's take a longer-term look:

This one is more troubling.  While the market didn't decline following a confluence of overbought signals in mid-April (which is good), we're just now coming off of a point where every one of the indicators had hit an overbought extreme (that's not good).

In addition, we could add mutual fund flows showing too much optimism among retail investors, poor ratios of corporate insider buying versus selling, and sentiment surveys showing too much positive opinion.

Overall, to me it suggests that we should rally from around this 905 area on the S&P 500, perhaps making another trip towards the upper end of the range.  But a move towards resistance that notches some short-term overbought readings probably will not lead to a sustained breakout above 950, given the longer-term signs above.

And if we can't muster a short-term rally from somewhere around here, then we need to be wary of a repeat of what we witnessed earlier this year.

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.

While there have been - and continue to be - many reasons to consider this rally something different than we'd seen previously in the bear market, I've been looking for the S&P to run into trouble if it traded into 940-950, which it happened last week.  I wasn't expecting any kind of waterfall decline to new lows, just more of a pullback than we'd seen.

What's made this juncture so difficult is that despite so many signs of "this time is different" and the market doing nothing wrong, there are some troubling signs out there.  We touched on a couple very recently, like the surge in speculative trading and the return of bullish opinion.  Because of that, I've been leery of the S&P's chances to hold a breakout above 950.

With the most recent surge in the spread between the Dumb Money and Smart Money Confidence, and the tendency for initial breakouts from volatility coils to be "false", I was looking for the first breakout above 950 to be beaten back, which occurred last week.  From here, we'll have to see how the market responds to oversold conditions in order to get a better handle on whether we're seeing just another correction, or the possibility of a larger trend change.

Bottom line - Short-term Outlook:  Neutral (since June 3, SPX 924)

There really isn't much to add here from what we touched on yesterday and again this morning in the paragraphs above.  We're short-term oversold, have been since yesterday, and we really should see a bounce from where we leveled off yesterday.

It's a bit troubling that the S&P never really managed a bounce from the oversold STEM.MR Model reading earlier this week, and it knifed so easily through support at 920.  Also, we hit some very modest overbought readings in the intraday Price Oscillators yesterday, and the indexes rolled right over almost immediately.  That's not a good combination.

I do still have a modest bullish bias here in the short-term given what we've looked at in the past couple of morning comments and intraday updates, but it's fairly dicey due to the above paragraph.  If we can't hold yesterday's lows and this 905ish area, I'd become quite concerned about the possibility of forthcoming heavy selling pressure and at least a trip back down to 880ish.

All the best,