Intel Looks Good, But Keep An Eye Open

Posted At 9:00 AM EST

Good morning...We begin the day with some fervent buying interest in the pre-market futures as they're indicated to open regular trading about where they were right after Intel's report yesterday afternoon.

The last time we looked at Intel (INTC) as a bellwether was on April 15, 2008 when the stock was gapping down about 5% in response to its earnings release.  At the time, we went over some data that suggested the gap down was actually a bullish omen for the market in the short-term, and indeed the market rallied smartly over the next couple of days.

The time before that was October 17, 2007, this time as INTC was gapping up several percent.  Conversely to what we discussed last April, the gap up opening wasn't nearly as bullish a sign, and in fact was fairly bearish for the market.  Again, the market complied with its historical stats and declined heartily over the next couple of days (and formed its bull market peak within the next couple of weeks).

So today's gap up isn't necessarily the best sign for the market - we really need to be careful of extrapolating these big gaps based on earnings reports from bellwether firms, as we've discussed many many times over the years.

Just as a reminder, there have been 17 times since '97 that Intel gapped up 5% during earnings season.  The S&P 500 also gapped up all 17 times, as it's indicated to do today.  But from the equivalent of today's open through the close two days later, the S&P's average return was -0.7% with only 6 of the 17 showing a positive number.

Getting away from Intel for a moment, one of my favorite people in this business is Helene Meisler, an old school, pen-and-paper kind of technician who currently writes a daily column for Realmoney.com.  One of her personal favorite indicators is the Index Put/Call Ratio from the Chicago Board Options Exchange.

High readings in this ratio aren't necessarily all that predictive, but when it gets very low, particularly under 1.0 (i.e. more calls options being traded than put options), then the market has often seen some short-term trouble.  Yesterday the ratio closed at 0.89.

Let's look at the last nine months or so, with arrows highlighting other times the ratio dropped to such a low level.

Since 1997, when the Index Put/Call Ratio dropped under 0.90, then over the next few days the S&P was positive 45% of the time with an average of -0.2%, well below average during that time.

Since the bear market began in 2007, it has dropped this low 17 times.  The S&P was positive over the next few days 6 of those times, however all but one of those positive exceptions occurred during March when almost all put/call ratios were acting goofy.  The other exception was on May 5th, after which the S&P promptly gave back its additional short-term gains during the next few sessions.

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, the market held up extremely well in spite of some 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 were - and continue to be - many reasons to consider this rally something different than we'd seen previously in the bear market, I was looking for the S&P to run into trouble if it traded into 940-950, which happened early in June.  I wasn't expecting any kind of waterfall decline to new lows, just more of a pullback than we'd seen.

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.

Not only that, but last week the S&P 500 triggered the Head & Shoulders pattern that we discussed last Monday.  When this pattern has been activated in individual stocks, much more often than not the stock went down to hit the target area.  For the S&P, that target would be around 840-850 or so depending on how you draw the trendlines.

Adding to the questionable nature of the uptrend, the market was not able to rally well off of short-term oversold conditions hit last Monday afternoon.  We did bounce a bit off those oversold conditions and technical support, but rolled right back over again.  The reaction off a second set of oversold conditions late last week was also meager, but the market did rally a bit, and 875 support did hold...so it's still a little early to consider the uptrend to be doomed.

Bottom line - Short-term Outlook:  25% Bearish (since July 15, SPX 916)

Yesterday in this section we touched on a few troubling factors, such as newly overbought shortest-term guides, impending negative seasonality for the next week or so, and potential resistance into 900-905 on the S&P 500 (cash index).

The index chopped around yesterday, but overall didn't flinch too much from those negatives, and managed to close right at the top of that resistance area.  My though was that while unlikely, the index could scoot up to 920ish if it managed to hurdle 905, and Intel has proved to be enough of a spark to ignite a test of that area.

I said yesterday that I'd be surprised if the S&P managed to hold above 920, and this morning I'll change "surprised" to "shocked".  Multiple up days...during a bear market...with short-term overbought readings...with negative seasonality...into strong resistance...based on a gap up on earnings, is not often sustainable.

All the best,