June 10, 2010, 7:20am EST   

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Thursday's Need-To-Know  

Smart / Dumb Money Confidence

 

* The price action over the past few days has been frustratingly inconsistent with a market that's trying to bottom, leaving little edge from what we study in the short-term.

 

* That frustration seems to be having an impact on traders in Rydex mutual funds, who have abandoned the long index funds and have started to build up sizable short positions, especially in the S&P 500 - close to a level seen at maximum pessimism during the bear market.

 

 

 

The Dumb Money is 46% 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:  Over the past several days, there hasn't been too much of an edge present in most of what we look at.  There were a couple of reasons to look for the usual "Turnaround Tuesday", which we got, but other than that it's been a tough market.  While we continue to sport some evidence of excessive pessimism (see the Indicators At Extremes table below), it's not exactly overwhelming, and we've had that for awhile without a sustained rally in prices.  That's been the most troubling aspect of all - the S&P should have broken above 1105 last week, but instead it failed miserably to a new low, and couldn't even rally much when the STEM.MR Model hit an oversold reading.  That's not what we see in healthy markets, and it's usually not what we see when a market is trying to bottom.  The window is still open for that multi-week rally to take hold, but the past week hasn't been encouraging and it's not going to remain open forever.  As it stands, given the lackluster price performance, we're just going to keep sitting on the sidelines in the short-term until a better risk/reward situation pops up.

 

Current S&P futures:  +10 points at 1066 

Sentiment:

Trend: 

Mixed, with some oversold readings.

Stuck in a range.

Sup / Res:

Other:

R: 1105; S: 1040

Neutral.

 

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Intermediate-term Outlook (1-3 Months):  Neutral  From June 4, 1065 SPX

 

 

What:  We will move to 25% Bullish if the S&P 500 cash index trades above 1080.  We will move back to Neutral if it subsequently trades below 1040.

 

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.  After we got the expected weakness and volatility exploded higher, we experienced 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.   Since late May, we've looked at quite a few  bullish intermediate-term studies - we got a major surge in pessimism, then several positive breadth thrusts and positive price performance, all in the context of an ongoing bull market.  That has led to consistent and significant gains when looking over the next 2 weeks to 1 month.  However, June 4th's Payroll Report kneecapped the nascent rally attempt and took us to a new closing low.  That is very unusual given the studies we discussed and cannot be dismissed, so we will have to wait for either better price recovery or another round of extreme conditions to become bullish again.

 

Recent Studies:

Two up days after a month without (6/04): Bearish

Multiple breadth thrusts (5/28): Bullish

Extremely high ADX reading (5/27): Bullish

Oversold Indicator Score (5/21): Bullish

Sentiment:

Trend: 

Relatively extreme, but weaker than before.

Still pointing up.

Sup / Res:

Other:

R: 1105; S: 1040

Nothing notable.

 

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Equity Indicators - Updates and Extremes

 

Rydex Assets

 

The inability of the market to stage any kind of lasting rally over the past couple of weeks is starting to really drag on traders in the Rydex family of mutual funds.  Most of the long-oriented index assets are slinking along near all-time lows.

 

That's true for the S&P 500, the Dow Jones Industrial Average and the Russell 2000.  The Nasdaq 100 long fund still has over $500 million invested in it, up from a low of about $350 million in the spring of 2009.  Of course, that's down from a peak of over $4 billion (!) in the spring of 2000.

 

Meanwhile, assets in the inverse funds (that profit on a market decline) are starting to flow in.  We're seeing some interest there for the Nasdaq 100, DJIA and Russell 2000.

 

Most notably, though, it's true for the big kahuna, the S&P 500, which now has $371 million in assets - close to a four-year high.

 

 

At the peaks in pessimism since the bear market began, assets in the fund rose to just over $400 million, so we're not quite matching those extremes...but we're very, very close.

 

The only other times in recent history it went over $400 million were 08/16/07, 10/09/08 and 03/03/09, all excellent buying opportunities (the last one took a few days of pain, but it was worth it).

 

If we combine all the assets in the bull funds for all four indexes, and divide them by the assets in the inverse funds, then we get the ratio in the chart below.

 

 

Again, we're not quite to the point of maximum pessimism that we saw during the depths of the bear market.  At its worst, the ratio dropped just under 1.0 (meaning there were more assets in the inverse funds than the long funds).  Currently, the ratio is 1.2 - definitely low enough to be considered extreme, but just not stretched to its maximum.

 

 

 

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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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