What:  We will move to neutral if the S&P 500 cash index trades above 1125, or if it drops below 1110 first and subsequently rallies more than 7 points.

Why:  Whatever positive connotations were generated by Monday's intraday reversal were dashed quickly after the gap up open yesterday, and we trended down pretty much all day.  Overnight, the futures drifted lower enough to finally close the gap from the vicious post-crash rally, making it a perfect 7-for-7 in closing 4% gaps up, though I would still prefer it occur during regular trading hours.  Yesterday's negativity didn't seep into many of our shorter-term sentiment guides, with some of the Rydex indicators actually showing more bullishness, not less.  The Nasdaq Cumulative TICK swung to an extreme overbought reading during the day, which is so incredibly unusual given the price action that it seems like it has to be a data error, but I can find no confirmation of that.  We've looked at a few studies suggesting that the kind of behavior we've seen post-crash is almost exactly in line with previous crashes, so I still see no reason to change the outlook for a volatile, choppy pattern between 1110-1180, with a generally positive bias when looking out a month or so.  We're heading into that lower zone this morning, so the next day or two will be an excellent test of that theory.  Given the gap down, if we see a lower intraday low after the first hour, I would not want to be a hero and try buying into the weakness, particularly if we also drop below 1100-1110 which I think should serve as some support here.

What:  We will remain Neutral for now.

Why:  On April 15th, the Dumb Money pushed up to 75%, and the spread between that and the Smart Money reached to -45%.  In addition, we got a tremendous surge in the number of bearish (for the market) Indicators At Extremes.  That's the kind of development that doesn't necessarily indicate an imminent market peak, but it does almost always mean that any further short-term gains will be erased.  Now that that has happened, and volatility has exploded higher, we have a very unusual situation with the "shock day" on May 6th.  We looked at somewhat similar days on May 7th, and the conclusions were clear - a short-term rally was likely, probably being capped at a 62% retracement of the crash, then a re-test of the panic lows.  We possibly got that re-test on May 17th with the S&P dropping below 1115.  It didn't quite close the gap created when the market gapped up on May 10th , which is a thorn in the side of the re-test idea (all previous gaps of +4% or more have been closed at some point).  We've looked at quite a few intermediate-term bullish studies over the past week, but continue to feel that for now we will most likely see more back-and-forth trading before a sustained multi-week bottom is in place.  Given historical post-crash precedents, we shouldn't see much activity below 1110 or so, or above 1180ish, and would look for prices to bounce within that range for now.