Some Time Away

Posted At 9:00 AM EST

Good morning...We begin the day with some modest buying pressure in the pre-market futures as they recover from what was relatively stiff selling earlier this morning.

When my daughter began having seizures in December, it was a wake-up call to re-organize my priorities.  Through 11 years, we've never taken a family vacation and other than a few days each November, I've very rarely left the office for more than an hour or two.  If you scroll through the archives back to 2002, you'll be hard-pressed to find a market day without comment.

That's just unacceptable, so with what's supposed to be a beautiful week in Minnesota, I'm taking some time off from comments this week to spend time with my family.  I'll still be watching the market, and if something notable happens I'll get out a brief comment here or there.  Most everything else on the site will be updated normally.

Volume should be dropping off precipitously heading into Wednesday and Thursday, and I suspect one of the next two days may see a relatively large move, but either way I don't think it'll be sustained.  Given what we discussed to leave off last week, that should particularly be the case with a move higher from here with the short-term overbought readings that recently triggered.  On a more intermediate-term basis, nothing has changed from the Summary immediately below.

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 earlier this month.  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.  Now that that's happened and we're nearing the opposite end of the May - June range, we need to see how the market responds to short-term oversold conditions, especially now that we've seen a "failed" rally above the 200-day average.

The recent 90% down volume readings when coming off of an intermediate-term high aren't necessarily a sign that the trend is changing, but if we can't get meaningful bounces from oversold conditions, and especially if we lose the 880ish area on the S&P, then a re-test of the March low looks to be in order.  So far the market has passed these tests.

Bottom line - Short-term Outlook:  25% Bearish  (Since June 25, SPX 918)

Friday's narrow-range day didn't resolve much of anything from what we discussed that morning.

The bounce back from oversold conditions prior to the FOMC decision has been enough to push our shortest-term guides into overbought territory, with the STEM.MR Model hitting its most-stretched level since March.

With the exception of the failed overbought signals coming right out of the March low, the S&P has struggled to maintain its short-term upside momentum the 7 other times we've hit or approached overbought in that model.  We also have a few signposts that triggered, also suggesting generally weak prices going forward.

I'm leery of the concept of window dressing into the end of the quarter, so as the S&P fills its downside gap from Monday morning and flirts with last week's highs in that 925ish zone, I'd be surprised to see a sustained breakout above there in the coming day(s).

All the best,