April 16, 2010, 7:40am EST   

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Friday's Need-To-Know  

Smart / Dumb Money Confidence


* Discussing more extremes at this point is becoming redundant - we've reached a practical maximum for the number of our indicators that have become stretched at one time, so at this point it is a waiting game.


* Historically, when we see a push in our indicators like this, according to the Indicator Score, then high-beta stocks like technology either peak or start to under-perform...which ultimately leads to a broad-market correction that erases the recent short-term gains.



The Dumb Money is 75% confident in a rally.

The Smart Money is 29% confident in a rally.


Smart/Dumb Confidence

View longer history



Short-term Outlook (1-5 Days):  25% Bearish  From Apr 13, 1194 SPX



What:  We will turn Neutral if the S&P 500 cash index trades at 1230.


Why:  There really isn't anything new to go over today that we haven't already discussed.  We're still seeing an abnormally large number of extremes among our indicators, and most of them cannot be easily explained away.  I've seen a few attempts to dismiss the extreme put/call readings due to some huge volume in Citigroup options, but that doesn't cut it - if we remove that one stock from yesterday's trading, then the CBOE Equity-Only Put/Call Ratio would only move from 0.37 to 0.39.  It doesn't change the implications at all, so this weekend's update of the ROBO and LOBO Put/Call Ratios will be exceptionally interesting.  All of these extremes have pushed our longer-term Indicator Score to one of the most-stretched readings in its history, which historically has meant that high-beta stocks were either about to peak or at best under-perform the broader market.  And each time, that meant that the broader market was ticking ever closer to a peak that was going to erase the additional short-term gains.  I see no reason to believe differently this time around, so the biggest question is how long we can continue to gravitate before it happens.  I don't have a good answer for that - the logical time is immediately following option expiration, but this market has not been logical (at least in terms of historical precedents).


Current S&P futures:  -2 points at 1206 



Mostly overbought.

Short-term uptrend.

Sup / Res:


R: 1200-1225; S: 1150

Nothing notable.



Intermediate-term Outlook (1-3 Months):  Neutral  From Feb 2, 1104 SPX



What:  We will remain Neutral for now.


Why:  In early January, the Dumb Money Confidence hit 75%, which was another successful "protect your gains" warning sign.  By early February, we went over several studies suggesting we were very close to a good multi-week buy signal, but they just missed triggering.  In the process, there have been some more encouraging signs (such as no overwhelming number of signs that we have seen a major market peak, the advance/decline line at a new all-time high and extreme momentum in small-cap stocks).  The spread between the Smart Money and Dumb Money has moved beyond -40%, the largest negative spread since early 2007, so there are some definite intermediate-term warning signs.  We've been waiting since then for either a surge in speculative activity, or waning momentum.  We appear to be getting the former, with the Dumb Money now at 75% and too many extremes to mention.  If the S&P 500 surges to 1220 or so in the coming day(s), we may move to a modest bearish position for the intermediate-term in response.




Exceptionally overbought

Still pointing up.

Sup / Res:


R: 1200-1225; S: 1110

Positive breadth, small-cap momentum



Equity Indicators - Updates and Extremes


Intermediate-term Indicator Score


All of the extremes in our indicators that we've been seeing over the past two days have helped to push the Intermediate-term Indicator Score to its most-stretched level in nearly 5 years.


The current reading has been matched or exceeded only four times in the 10-year history of the model.



Here are the dates, along with the S&P 500's performance going forward:


06/04/03:  The S&P rose 2.9% over the next 10 days.  The gains were all given back during the subsequent correction.


01/07/04:  The S&P rose 3.3% over the next 12 days.  The gains were all given back during the subsequent correction.


11/26/04:  The S&P rose 2.9% over the next 25 days.  The gains were all given back during the subsequent correction.


12/15/06:  The S&P rose 2.4% over the next 42 days.  The gains were all given back during the subsequent correction.


Each time, the S&P was able to keep chugging higher for 2 weeks up to 2 months, but the gains were relatively muted.  And also each time, which we have seen time and time again in these comments over the past two weeks or so, the additional short-term gains were given back during the subsequent corrections.


Something interesting to note is that the Nasdaq 100 fared significantly worse than the S&P beginning almost immediately after those dates, and lasting anywhere from a couple of weeks to a few months afterward.


The chart below is the ratio of the Nasdaq 100 to the S&P 500, with the dashed vertical lines representing the four dates mentioned above.  A rising line would mean the Nasdaq 100 is out-performing the S&P 500.



It's hard to make out on a couple of them, but in each case the NDX was either immediately or within days going to start rising less (or even declining) while the S&P trudged along.


This is what we often see at momentum peaks with excessive sentiment - the higher-beta stocks start to falter, and the rest of the stock universe might be able to keep it up for a while, but eventually it all comes back to Earth.



Equity Market Indicators



The relentless uptrend since the February bottom met with a couple of spikes in our bearish (for the market) indicators, and except for a small hiccup here and there, stocks didn't pay much mind.


On Wednesday, however, we got a huge surge in the number of bearish indicators, to nearly 50% of the ones we follow.  That is tied with the most ever in the past five years.  We do not take that as a good short-term sign for the market.


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



List Of Extremes

  Bearish For The Market

  Bullish For The Market

NASDAQ/NYSE Volume Ratio

Price Oscillator - NDX


Up Issues Ratio - NYSE

Up Issues Ration - NASDAQ

Composite Model

Stock/Bond Ratio

Daily Cumulative Tick - NASDAQ

Put/Call Ratio - Total of Moving Averages

Down Pressure - NDX

Liquidity Premium - SPY

Up Volume Ratio - NYSE

UP Volume Ratio - NASDAQ

Put/Call Ratio - Total Of All Options

STEM Model

Put/Call Ratio - Equity De-Trended

Put/Call Ratio - Equity Options Only

Rydex % Of Sectors Above 50-Day Avg.

Rydex Ratio

Put/Call Ratio - Equity Moving Averages

VIX Transform

Liquidity Premium -  QQQQ

ROBO Put/Call Ratio

Options Speculation Index

NH/NL Ratio - NYSE

NH/NL - Nasdaq

Sentiment Survey - Investors Intelligence

Sentiment Survey - Consensus, Inc.

Sentiment Survey - AAII

AIM Model

Smart Money / Dumb Money Confidence


Put/Call Ratio - OEX Options Only

* 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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