April 23, 2010, 7:30am EST   

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Friday's Need-To-Know  

Smart / Dumb Money Confidence


* You ever see one of those zombie movies where the guy shoots the monster like 15 times, and it just keeps attacking?  Well, the bears have been shooting zombie buyers for a week now, and they keep coming back.  Any basis for continuing to shoot is hanging by a thread.


* We looked at the market's momentum several times during March, and it continues to impress.  The two-month string of up days recently reached epic proportions, and history suggests that it will not stop anytime soon (on an intermediate-term basis).



The Dumb Money is 71% confident in a rally.

The Smart Money is 38% confident in a rally.


Smart/Dumb Confidence

View longer history



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




Recent Studies:

Small options traders are bullish (4/19): Bearish

Confluence of sentiment extremes (4/15): Bearish


What:  We will turn Neutral if the S&P 500 cash index trades at 1215.


Why:  Yesterday I noted that the three other times that the S&P 500 had gapped down at least -0.5% since February, it recovered to close at least 1% higher than the open.  It did so yet again yesterday.  I was looking to see if we could set a lower intraday low after the first hour of trading, as that would give a good indication that we were seeing a change in character.  That did not happen.  Given everything we've gone over during the past two weeks, that was the single best opportunity for the bears to change the tone of the market.  The fact that there was not enough selling interest to do so speaks volumes, and it has greatly diminished my already-low desire to try to bet against this market if it manages to trade to new highs.  That view is reinforced with the study we discuss below about the market's momentum.  We'll just have to likely chalk down the recent movements to an abject failure for the recent spike in extremes to mark an exhaustion point, which is a very rare occurrence and should be respected.  The market can do anything (obviously), so perhaps we'll get one of those famous "fakeout breakouts", or even reverse hard from here.  But given the recent price action and inability to stop the constant bid underneath even the smallest declines, there is little evidence to suggest that a decline now is more likely than it was the past few days.


Current S&P futures:  +4 points at 1206 



Mixed readings.

Short-term uptrend.

Sup / Res:


R: 1200-1225; S: 1150

Nothing notable.


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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 got the former, with a surge to 75% in the Dumb Money.  But the price momentum has been historic, which usually means even higher prices during the months ahead, and we have not seen any evidence of it waning yet, so it still appears way too early to bet against this recovery on a multi-week or multi-month time frame.



Recent Studies:

Historic price momentum (4/23): Bullish

Extreme Indicator Score (4/16): Bearish

Earnings season after a rally (4/08): Bearish

Smart/Dumb Money extreme (4/07): Bearish

Surge in new highs (3/18): Bullish

Thrust in Up Volume (3/12): Bullish



Exceptionally overbought

Still pointing up.

Sup / Res:


R: 1200-1225; S: 1110

Nothing notable.


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Equity Indicators - Updates and Extremes


Number Of Up Days In The Past Two Months


A major hallmark of the rally off the February low has been the sheer number of examples of historic momentum we've seen.  Perhaps none are more impressive than the simple number of positive days.


Over the past two months (42 trading days), the S&P 500 recently enjoyed a remarkable 31 closes higher than the previous day's.  That's not a common feat - in fact, we've seen it only once before in the past 15 years.



To see just how rare it is, and what it may portend, let's go all the way back to 1928 and look for any other time the S&P enjoyed at least 31 winning days out of the past 42 sessions.


What we'll look at is how long it took, and what kind of rally it mustered, before the index formed at least a two-month peak and suffered at least a 5% correction:



Days Until

5% Correction

Max Gain Until

5% Correction

07/12/29 47 12%
02/01/43 135 20%
07/05/55 110 11%
07/28/58 256 29%
01/30/61 53 11%
09/24/65 95 4%
11/25/68 3 2%
12/28/70 84 15%
06/18/80 113 21%
03/22/95 298 37%
11/21/06 163 11%
Median 110 12%


It's probably not a big surprise that this kind of momentum often indicated that the rally had a long time yet to go.  There was only one precedent, in 1968, when the S&P topped out soon after the momentum reached the current level.


In every other case, the index took at least another two months before it formed a top.  And in all other cases but one, it rallied more than 10% to get there.  The exception was in 1965 when it took an amazing 95 days to rally a measly 4% at the most before rolling over.


This does not mean that the S&P didn't suffer short-term scares along the way - it certainly did.  But the declines were either too short, and the index climbed to another high quickly after, or they were too modest (less than -5%) to count in the study.  Even some of the sentiment-based studies we looked at recently confirmed this kind of market behavior.


Let's flip the data around and look for the opposite condition, times when the S&P managed only 11 up days out of the past 42:



Days Until

5% Rally

Max Loss Until

5% Rally

04/20/32 35 -27%
11/13/41 37 -9%
05/23/62 23 -14%
04/30/70 18 -15%
07/06/82 27 -5%
Median 27 -14%


The downward momentum once again was not a signal that the S&P was about to reverse immediately, but the time to get to a turning point was significantly shorter than for the first table.


Every one of the instances formed a bottom within two months, though the drawdowns to get there were hefty, especially in '32.


This data confirms something we already know and have discussed many times on the site - upside momentum is very difficult to kill, and while it can precede choppy conditions for extended periods, it rarely results in imminent, substantial intermediate-term corrections.


On the flip side, when investors panic they tend to do so en masse, and we get very swift, painful declines.  The positive side of that is that the damage gets done fairly quickly, and when we see such persistent downside momentum, it usually pays to at least start looking for reversal signals to trade the rebound.



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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



* New extreme

See all indicators


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Bonds, Commodities and Currencies - Updates and Extremes


Nothing notable for today.



Jason Goepfert

Founder, Sundial Capital Research, Inc.


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