Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

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Equity Indicators - Updates and Extremes

AAII Bull Ratio

Many have cited the so-called "wall of worry" that the market has been climbing.  I'm not quite sure how to justify that statement, other than perhaps the lack of inflows to equity mutual funds, but we got an interesting twist this week.

Despite a greater than 1% weekly loss in the S&P 500 during the survey period, the percentage of bullish individual investors in the AAII survey jumped nearly 6% (from 53% to 59%).  So instead of a "wall of worry", perhaps this is a "slope of hope"?

Anyone reading these comments for a while probably knows that I don't have any faith in the "wall of worry" concept.  The same is usually true of the opposite.  Not because of any personal bias, it's just that they don't test out when we move away from the textbooks and look at actual facts.

Let's go back to the inception of the AAII survey in 1987 and look for any time the S&P dropped as much as it did during the survey period this past week, and yet the percentage of bulls increased at least 5%, and see how the S&P performed going forward:

Hmm, not much difference between the study numbers and any random time.  The next-week numbers were the most notable, being higher than average   In fact, the average return was slightly higher across all time frames among the 63 instances, though they were not statistically significant.

When we look at times when the Bull Ratio was at least 59%, then the number of occurrences drops to 39 weeks:

The shorter-term numbers didn't really change in these cases, but the higher Bull Ratio did seem to inhibit the longer-term performance of the S&P.  The average 1-month return dropped 30% and the 3-month return 48% from the table above.

Overall, I don't think there's a whole lot to read into this (besides the fact that all of the decline occurred late in the survey period).  Just like the bulls are probably putting too much faith in the wall of worry, the bears that will try to seize on this week's numbers are probably just as guilty.

Post-FOMC Performance

The markets did their usual pre-FOMC dance yesterday by rising modestly heading into the early afternoon and then whipping back and forth a few times after the announcement.

We're on pace for a fairly large gap open this morning, so let's look for any time that the S&P rose at least +0.5% on a FOMC day, then gapped up at least +0.25% the next morning.  The following returns are through the next day's close:

Over the years, we've gone over this kind of bias many, many times and it usually pans out.  Over the past couple of months, this kind of tendency has been less fruitful as the market has subject to the momentum animal spirits.

Even so, since the beginning of the March 2009 rally, we've still seen the market trip up in the short-term 3 of the 4 times.  The last one, just last month, did show a positive return, but all that (and more) was given back the very next day.

The biggest fly in this seasonal ointment?  The end-of-month effect.  The last couple of days in April through the first few in May have been positive 8 of the last 9 years, and 66% of the time since 1928.

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