February 2, 2010, 7:45am EST   

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Tuesday's Need-To-Know  

Smart / Dumb Money Confidence

 

* We have several conflicting indicators for the short-term, making any directional call a low-probability effort.

 

* From a more intermediate-term standpoint, yesterday's trading would be rare if looking for a bottoming signal.

 

* When the S&P bounces like it did yesterday, we typically see a bit of very short-term follow-through, then a test (and, usually, violation) of the pre-bounce levels.

  

 

The Dumb Money is 42% confident in a rally.

The Smart Money is 50% confident in a rally.

 

Smart/Dumb Confidence

View longer history

 

 

Short-term Outlook:  Neutral  From Jan 27, 1090 SPX

 

 

What:  We will remain neutral for now.

 

Why:  I mentioned yesterday that this had a "sloppy bottom" look.  Some of what we saw last week, such as the surge in the Intermediate-term Indicator Score that we discussed yesterday, would support a multi-day or even multi-week bounce.  But it would have been better to see more of a short-term washout first, instead of a weak rebound like yesterday.  We take a look at that pattern below, and it's not exactly encouraging for the rest of the week.  Our short-term indicators are mixed, with some bad warning signs (like an overbought Cumulative TICK for the Nasdaq 100) versus some signs that traders are still too pessimistic (like the Rydex Beta Chase).  In these conflicted scenarios I prefer to stay out and wait for better probabilities.  The best bets I see from here are a possible short if we rally weakly into 1100ish with a plethora of overbought readings in our more sensitive indicators, or (preferably) a long opportunity with a resumption of the decline and a swing back to excessive pessimism in our guides.

Sentiment:

Trend: 

Mixed.

Short-term trends are down.

Sup / Res:

Other:

Resistance from 1105-1100.

Nothing notable.

 

 

Intermediate-term Outlook:  25% Bearish  From Jan 21, 1116 SPX

 

 

What:  We will turn Neutral if the S&P 500 cash index trades above 1104.

 

Why:  On January 8th, the Dumb Money Confidence hit 75%, and every time we've seen that 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).  Now that that's happened again, we're getting conflicting studies about whether the price action over the past two weeks is a sign of a larger trend change.  We don't have many signs that we have seen a major market peak, and several sentiment measures have turned very quickly from where they were a couple of weeks ago.  If we see a couple more days of selling pressure, it would fit in with the final, exhaustive periods of some past declines and should lead to a multi-day or even multi-week bounce.  Should that happen, such a bounce may trigger more signs that accompany longer-term market peaks.

 

Sentiment:

Trend: 

Mostly neutral, though getting a few oversold signals.

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

Sup / Res:

Other:

Resistance at 1100, support at 1030.

Nothing notable.

 

 

Equity Indicators - Updates and Extremes

 

S&P 500 Price And Volume

 

The bounce yesterday in the S&P was not what we often see at an important turning point.

 

We got a gap up (on a Monday, no less) after closing at at least a two-month low the prior day, and volume was very light compared to recent days.  Using the S&P 500 SPDR (SPY), volume was 40% lighter on Monday than it was on Friday.

 

 

While this was sometimes part of a complex bottoming pattern where we got back-and-forth trading, we rarely saw the market just shoot higher.

 

When we've seen this in the past, using SPY, then the next morning we saw a gap up opening 69% of the time as the buying carried forward.  We're seeing that again today.

 

But from that next morning (whether it gapped up or not) and through the next couple of weeks, the average risk was more than twice as great as the average maximum gain.  Over the next 3 days, for example, the median return was -0.6%, with a drawdown (-2.6%) that eclipsed the max gain (+0.9%).

 

There have been 6 times it occurred on a Monday.  Buying Tuesday's open and holding for the rest of the week resulted in 1 winner, 5 losers and a -3.0% median return.  The table below shows all six occurrences and SPY's performance for the next four days.

 

Date

Rest Of

Week

Max

Loss

Max

Gain
02/27/01 -2.5% -4.0% 0.8%
03/20/01 -2.9% -8.4% 0.5%
09/25/01 3.7% -0.8% 3.8%
06/18/02 -4.3% -4.9% 1.2%
07/31/07 -3.1% -3.5% 0.8%
10/14/08 -11.0% -17.3% 0.8%
Median -3.0% -4.4% +0.8%

 

Equity Market Indicators

 

Notes:

Many of our shorter-term indicators have moved well into oversold territory, especially in the Volatility and Breadth groups.

 

Last week, we had more bullish (for the market) indicators than bearish ones.  The three other times that's occurred since the March low, stocks were able to form bottoms quickly thereafter.  If we don't see that soon, then it will be a definite change in character for this uptrend.

 

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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