June 4, 2010, 7:00am EST   

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Friday's Need-To-Know  

Smart / Dumb Money Confidence

 

* Trying to give any short-term forecasts before the payroll report is foolhardy - the estimates for today's number are wider than they've ever been, so uncertainty is at nosebleed levels, and we could easily see vicious whipsaws after the number is out and during regular trading hours.

 

* The May crash certainly dented individuals' attitudes towards stocks, and when they've dropped their allocation to stocks by 10% or more, it has typically been a positive over the following weeks.

 

* Not all is rosy, however.  The first consistently bearish pattern we've seen in over a week triggered yesterday, and it is a concern.

 

 

 

The Dumb Money is 42% confident in a rally.

The Smart Money is 58% confident in a rally.

 

Smart/Dumb Confidence

View longer history

 

 

Short-term Outlook (1-5 Days):  Neutral  From May 25, 1049 SPX

 

 

 

Recent Studies:

Post-crash trading patterns (5/07): Mixed

 

What:  We will remain Neutral for now.

 

Why:  The short-term outlook, forecasted right now, is a complete toss-up.  The jobs report will likely have huge influence over what happens today, and today will greatly impact what happens early next week.  Either we get that breakout over 1105 on the S&P that will trigger many "bottom" calls, or we fail and form a double-top.  There is more uncertainty surrounding today's jobs report than there has ever been - economists' estimates are wider than they've been in at least a decade.  There will be even more confusion than usual given the role of census worker hires, so the headline number may not be all it appears.  With such wild guesses as to what number may print, making any forecasts for stocks is nothing better than, well, a wild guess.  I would note that the usual pattern is for a large gap down to get erased in the following day(s), and the same for a large gap up, so I don't think a big knee-jerk reaction will necessarily be a good tell of what's to come.  Given what we've discussed over the past week, the overall resolution should be higher, but obviously today will play a huge role in whether that's the case.

 

Current S&P futures:  -3 points at 1100 

Sentiment:

Trend: 

Mostly neutral.

Stuck in a range.

Sup / Res:

Other:

R: 1105; S: 1065

Neutral.

 

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Intermediate-term Outlook (1-3 Months):  50% Bullish  From May 27, 1093 SPX

 

 

What:  We will move back to Neutral if the S&P 500 cash index trades below 1065.

 

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've looked at quite a few intermediate-term bullish studies over the past week, and given Thursday's gap up open of more than +2% from a multi-month low, history suggests we've seen the worst of the selling for the next several weeks at least.  That doesn't mean it won't be volatile, but we should see a trend of generally rising prices.

 

Recent Studies:

Multiple breadth thrusts (5/28): Bullish

Extremely high ADX reading (5/27): Bullish

Oversold Indicator Score (5/21): Bullish

Sentiment:

Trend: 

Many examples of extreme pessimism.

Still pointing up.

Sup / Res:

Other:

R: 1140; S: 1065

Nothing notable.

 

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Equity Indicators - Updates and Extremes

 

Individual Investor Asset Allocation

 

Yesterday, we looked at the investment allocations of individual investors as polled by the American Association Of Individual Investors (AAII).

 

The May market crash apparently scared quite a few folks, as their allocation to stocks dropped 15% from where it was in April.  That was the 3rd-largest one-month drop in the survey's 23-year history.

 

 

Let's go back and look at how the S&P 500 has fared after other one-month declines of -10% or more in individuals' stock allocation (note for the anal-retentive: dates and prices are calculated from the Friday prior to the actual release of the monthly data).

 

Date

Stock

Allocation

One-Month

Change

1 Month

Later

2 Months

Later

3 Months

Later

11/04/05 52 -20% 3.7% 5.2% 8.7%
06/02/06 57 -18% -1.3% 0.5% 8.4%
10/31/08 44 -14% -7.5% -14.1% -9.4%
08/31/07 58 -13% 3.6% -2.3% -9.7%
11/01/02 43 -13% 3.9% -4.4% 3.2%
09/03/04 56 -11% 1.6% 6.2% 9.7%
10/05/01 58 -11% 1.5% 8.4% 4.8%
01/29/10 57 -11% 2.9% 13.4%  
07/31/09 51 -11% 4.2% 9.3% 8.7%
06/02/00 67 -10% -1.5% 2.0% -11.0%
05/04/01 61 -10% -0.5% -4.8% -14.2%
06/04/04 63 -10% 0.3% -1.3% 6.1%
09/02/88 47 -10% 2.8% 1.0% 10.1%
08/02/02 50 -10% 6.0% 3.9% -1.0%
         
  Average 1.4% 1.6% 1.1%
  % Positive 71% 64% 62%

 

The shorter-term results were fairly positive.  The S&P was up 10 out of 14 times, and three of the losses were under -1.5%.  There was really only one major failure.  Any upside edge, however, dissipated after that.

 

So there is some precedent that the recent dumping of shares by these guys is a modest positive factor when looking over the next several weeks.

 

Now let's flip it around and look at the other extreme - one-month jumps of +10% or more in stock allocations.

 

Date

Stock

Allocation

One-Month

Change

1 Month

Later

2 Months

Later

3 Months

Later

07/03/03 64 24% -0.6% 1.1% 12.5%
12/06/02 53 23% -0.4% -7.8% 8.3%
05/01/09 50 22% 4.7% 11.6% 18.1%
12/02/05 63 19% -1.3% 1.9% 1.8%
10/05/07 68 18% -3.1% -5.1% -12.0%
12/31/09 64 16% -3.7% 4.6%  
07/01/05 67 15% 3.3% 1.7% 4.5%
06/01/01 70 14% -2.9% -6.0% -9.6%
01/30/09 48 14% -11.0% 4.9% 19.6%
04/05/91 52 13% 1.4% -1.1% 1.6%
03/03/89 48 12% 1.3% 10.4% 21.5%
07/02/09 57 12% 10.2% 16.5% 24.4%
03/05/93 59 11% -1.1% 0.9% 3.4%
08/05/88 52 11% -2.5% 2.7% 9.5%
01/05/90 52 11% -6.0% -3.5% 1.8%
05/02/03 53 10% 3.6% 7.4% 13.0%
05/04/07 69 10% 2.0% -3.1% 0.3%
03/01/91 46 10% 1.3% 1.9% 6.7%
         
  Average -0.3% 2.2% 7.4%
  % Positive 44% 67% 88%

 

We have the opposite scenario here, but not quite as dramatic.  The shorter-term results were mostly negative, though there were five cases where the S&P jumped more than +2% over the next month.  After three months, the returns were excellent, with an average return of more than +7% and only two negative results (though they were large losses...).

 

 

Three Month Low Then Two Up Days For The First Time In A Month

 

Everything we've looked at over the past week has suggested the low, for now, is most likely in.  We should see rising prices over the next several weeks.

 

The studies we've looked at on the site are not cherry-picked because they happen to support that outlook; rather, the outlook is generated because of what the studies have suggested.

 

Unfortunately, we now have a price pattern that doesn't support that outlook, and it has been quite consistent when it's happened in the past.

 

Here's the deal.  The S&P 500 hit a three-month low recently, then finally scored two consecutive positive days for the first time in over a month.  Many take that to mean that the downtrend is definitely over, since the pattern of selling pressure has finally been broken.

 

 

Historically, however, the exact opposite is typically the case.

 

The table below shows all instances since 1928 when this has occurred, along with the S&P's performance going forward.

 

Date

# Of Days

Since Two

Up Days

1 Day

Later

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

6 Months

Later

06/26/30 21 -1.0% 2.3% 2.8% 8.3% 7.5% -18.1%
10/15/30 22 -1.8% -6.3% -1.9% -14.6% -15.7% -2.1%
04/20/31 24 -2.6% -6.3% -7.1% -8.1% -4.4% -28.2%
10/16/31 37 0.2% 1.4% -2.4% 7.2% -27.0% -23.2%
12/19/31 33 -3.0% -7.6% -10.1% 3.8% 6.9% -34.9%
04/15/32 33 -1.4% -2.8% -6.1% -6.4% -29.8% 14.5%
06/03/32 30 6.7% -6.5% 4.7% -9.2% 55.4% 33.3%
03/22/35 32 -1.1% -1.2% 0.2% 7.0% 15.1% 33.9%
01/31/39 24 -1.5% 1.4% 0.5% 2.7% -13.3% -10.8%
09/16/46 22 -0.8% -6.4% -3.1% -4.5% -4.9% 2.1%
09/02/53 21 -0.2% -0.6% -2.6% 0.1% 5.9% 12.5%
04/18/62 23 0.5% -1.8% -3.0% -6.5% -17.4% -16.7%
06/27/69 24 0.4% 1.7% -3.2% -7.6% -4.0% -6.2%
05/07/70 28 -0.5% -5.5% -9.5% -4.6% -3.3% 5.5%
08/28/73 22 1.0% 1.6% 0.3% 5.9% -7.1% -6.4%
11/16/78 27 0.8% 2.2% 2.6% -0.3% 5.3% 6.6%
03/19/80 23 -1.1% -5.4% -2.1% -3.6% 11.5% 23.5%
03/10/82 26 0.0% -0.3% 3.5% 6.2% -0.4% 11.7%
12/28/83 21 -0.3% 2.1% 1.0% -0.8% -3.3% -8.3%
02/27/84 27 -1.6% -0.9% -1.6% -1.3% -4.8% 5.2%
03/06/01 23 0.6% -4.5% -10.5% -12.0% 2.4% -9.6%
09/25/01 25 -0.5% 3.9% 6.8% 7.2% 13.1% 13.1%
05/01/02 22 -0.2% 0.2% 1.1% -1.8% -18.6% -18.0%
10/31/08 24 -0.3% -3.9% -12.2% -12.4% -13.4% -6.7%
             
Average 26 -0.3% -1.8% -2.2% -1.9% -1.9% -1.1%
% Positive   29% 38% 42% 38% 38% 46%

 

Across every time frame, the results were negative, especially in the 1-month time frame that I've been looking at as most likely to show a positive return now.

 

I don't like this one bit, but I can't explain away the implications.  It's bearish, pure and simple.  It is not a good price pattern.  The persistency of the decline that we've seen, leading to a multi-month low, has usually resumed very soon after scoring two straight up days.

 

There were a few exceptions.  In June 1930, March 1935, August 1973, March 1982 and after 9/11, any short-term weakness was quickly reversed and we saw decent gains over the next several weeks.  Pretty much every other instance, in a word, sucked.

 

I'm a weight-of-the-evidence kind of guy, so given everything we've looked at lately, I'm still inclined to stay with the outlook for higher prices over the coming weeks.  But I will not be sticking around if recent support fails to hold.

 

 

 

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Equity Market Indicators

 

Notes:

In mid-April, we got a huge spike in the number of bearish (for the market) indicators, and after a tiny hiccup, stocks went on to make another high.  It was choppy and took longer than usual, but it finally resulted in those gains begin given back per usual.

 

Now we've seen the opposite condition, with only one bearish extreme and more than 40% of our indicators at a bullish extreme on May 24th.  That's the most since March 2009, though it has gotten as high as 50% - 70% at some of the true panic lows over the years.  We've certainly seen enough extremes for a tradable bottom - just not a maximum reading.

 

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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