For January 21, 2010   

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Thursday's Need-To-Know  

Smart / Dumb Money Confidence


* Traders are sorting out Goldman's earnings report and judging the damage from yesterday.  Google will be the major focus after the close.


* The S&P 500 remains mired in a range between 1130 and 1150, a break of which should clear up the short-term picture.


* A table of major (six-month) market peaks in the S&P 500 since 1939 shows that we don't meet many of the conditions of past peaks just yet.



The Dumb Money is 71% confident in a rally.

The Smart Money is 46% confident in a rally.


Smart/Dumb Confidence

View longer history



Short-term Outlook:  25% Bearish  As of Jan 12, 1134 SPX



What:  We will move to 50% Bearish if the S&P 500 trades below 1128.  We'll move to Neutral if it trades above 1151.


Why:  The market remains resilient, shrugging off each attempt to break below widely watched support levels (namely, 1130).  But it's also had difficulty overtaking 1150, so we're still unresolved here in the short-term.  Based on everything we've looked at over the past couple of weeks, our bias still clearly favors a downside break as opposed to sustained upside, so we continue to watch for a clear violation of the recent short-term lows for a move back down towards 1100-1110.  If we shrug off yesterday's move like we have most 1% down days over the past few months, then we will have no choice but to move back to neutral.




Still too many signs of complacency.

All short-term trends are positive.

Sup / Res:


Resistance at 1150, major support at 1130.

Seasonality is modestly negative.



Intermediate-term Outlook:  Neutral  As of Apr 9, 843 SPX



What:  We will turn 25% Bearish if the S&P 500 closes below 1128.


Why:  In March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration, or perhaps even more.  The rally exceeded all kinds of expectations, and on an intermediate-term time frame we haven't seen too many reasons to expect an imminent end.  Now we have the Dumb Money Confidence at 75%, and the Smart/Dumb Spread at -38%.  Every time we've seen this kind of extreme in the past 15 years, any further short-term strength (over 2-4 weeks) was reversed longer-term (over 1-3 months).  We expect the same this time around, so it's just a matter of waiting to see if and when price action starts to crack.




Smart/Dumb Confidence is bearish.

Rrising 200-day avg; higher highs/higher lows.

Sup / Res:


Trading near new highs.

Seasonality is modestly negative.



Equity Indicators - Updates and Extremes


Market Top Conditions


There was an article posted to CBS Marketwatch yesterday that generated a lot of questions.  The gist of it was that markets don't top when the number of stocks hitting new 52-week highs is robust; we're currently seeing many new highs, therefore we're not at a market top.


We've discussed this type of thing many times over the years, and there's certainly truth to it.  When we get this kind of momentum and breadth, then we typically don't enter a deep and prolonged decline immediately.  Short- to intermediate-term corrections are normal, but a new bear market for example would be out of the norm.


To further the idea, let's take a look at the table below (you'll have to click the link to open up a larger version).  What the table shows is each six-month peak in the S&P 500 since late 1939 to the present, and a sampling of various economic, monetary, breadth and sentiment conditions at the time.  Also shown are our current conditions and whether they suggest we're at a peak.


Click table for larger view


Bottom line, does this suggest we're at a major peak?  Not really.


Out of the 14 conditions that gave a clear bias for a top, we currently only meet 5 of them.  Here are the reasons why they suggest that we're not at a top:


*  Consumer confidence is too low, and is at its highest point in a year.


*  The Federal Funds rate is exceptionally low.


*  The P/E Ratio of the DJIA is about average, though the Dividend Yield is well below average (that's bad).


*  The percentage of stocks at a new high are well above average (only one top was formed with this many new highs).


*  There is currently no divergences between the Dow Jones Industrials and Transports.


*  The Investor's Intelligence Bull Ratio is very high (that's bad), but still at its most optimistic level in a year (as of last week).


*  Mutual fund cash levels are exceptionally low (that's bad), but when we top we have usually seen managers start to raise cash already.


*  Short interest on the NYSE is very low (that's bad), but like the prior two conditions, we usually see sentiment turning by the time the market peaks.


While many of the studies and indicators we've looked at over the past couple of weeks suggest more weakness than strength ahead, they are for the short- to intermediate-term.  Longer-term, we don't have many of the conditions for a major reversal yet.


Equity Market Indicators



Since the March bottom, every time we saw 0% of our indicators at a bullish (for the market) extreme and 30% or more at a bearish extreme, the S&P 500 formed a short-term peak quickly thereafter.  We saw that kind of condition again on December 22nd, but the illiquid holiday trading conditions helped minimize any negative impact.


There was another surge in bearish indicators on January 4th, but so far the market is holding above those levels.  The latest dip has served to take our indicators off their worst extremes, but we're still seeing more bearish indicators than we have during most of the post-March runup.


More history:   Short-term Score     Long-term Score    Indicators At Extremes



* New extreme

See all indicators



Bonds, Commodities and Currencies - Updates and Extremes


Nothing notable for today.


Jason Goepfert

Founder, Sundial Capital Research, Inc.



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