June 22, 2010, 7:00am EST   

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Tuesday's Need-To-Know  

Smart / Dumb Money Confidence

 

* The market has done nothing but chop for the past week, closing within a 4-point range on the S&P 500.  That may turn out to be a good thing, if we can get some oversold readings, above support, heading into the FOMC announcement.

 

* Speaking of, the day before FOMC announcements has been modestly negative, but the day of has been markedly positive, especially over the past couple of years.

 

* Yesterday's price reversal looks ominous, but other than the very short-term, it doesn't have an impressive predictive record.

 

 

 

The Dumb Money is 54% confident in a rally.

The Smart Money is 54% confident in a rally.

 

Smart/Dumb Confidence

View longer history

 

 

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

 

 

 

Recent Studies:

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

 

Today's Update:  If the S&P 500 e-mini futures are between 1100-1105 at 4pm EST, we will move to 25% Bullish.

 

Why:  Despite all the sound and fury yesterday, there really isn't much that has changed in the past week.  The S&P 500 has closed within a 4-point range over the past five days, from 1113 - 1117.  That kind of meandering price action is not conducive to triggering sentiment extremes, and it hasn't.  Most of our indicators have been busy making their way back to neutral instead of moving to new extremes.  Yesterday's afternoon selling was enough to move a couple of our shortest-term guides into oversold territory just as the major equity indexes come back to test the potential support area that marked their upside breakout last week.  The best setup for a bounce would be another very mild day of selling pressure today, which would lead us into the typical FOMC-day rally (see below).  Yesterday's kind of reversal has not necessarily been a great sell signal (see below), so other than the very short-term it shouldn't influence events too much.  Bottom line, I'm still not seeing a huge edge in the short-term, which has been the case as the S&P has chopped around in this tight range, but if we can settle slightly lower heading into Wednesday it may pay to look for the typical rally.

 

Current S&P futures:  -4 points at 1106 

Sentiment:

Trend: 

Mostly neutral, a few oversold readings.

In an uptrend as long as we're above 1100.

Sup / Res:

Other:

R: 1140; S: 1105

Neutral.

 

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Intermediate-term Outlook (1-3 Months):  25% Bullish  Since June 10, 1080 SPX

 

 

Today's Update:  We will move back to Neutral if the S&P 500 cash index trades below 1103.

 

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.  But since we have seen a lot of give-up among Rydex traders and small options traders, and the S&P made another go at a breakout above resistance, we're willing to give the bullish outlook another shot.

 

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: 

Back to mostly neutral readings.

Still pointing up.

Sup / Res:

Other:

R: 1140; S: 1040

Nothing notable.

 

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Equity Indicators - Updates and Extremes

 

S&P 500 Price Reversal

 

The last time we discussed a price reversal pattern here was on May 24th, when we looked at what happened after bullish rebounds from multi-month lows.  While it was a little bit hairy for a couple of hours, the pattern played out almost perfectly in line with the historical precedents.

 

Yesterday's rejection from the early gap up wasn't quite as dramatic, but it was enough to get a lot of people's attention.

 

 

Let's take a look at how the S&P 500 futures fared after other days when the contract gapped up to the highest level in at least a month, then reversed to close below the close of the prior four days.

 

Date

1 Day

Later

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

09/22/82 1.3% -1.8% 2.7% 15.5% 15.3%
09/12/83 0.0% 3.0% 3.8% 3.9% 0.6%
11/30/83 0.6% 0.2% -1.7% 0.5% -4.2%
01/03/00 -3.8% 0.6% 0.2% -3.5% 4.2%
10/17/01 -0.3% 0.8% -1.4% 6.4% 5.4%
10/24/02 2.1% 0.6% 2.5% 5.5% -3.8%
08/22/03 0.1% 1.5% 3.8% 3.3% 4.0%
11/07/03 -0.4% -0.1% -1.3% 1.0% 8.8%
04/08/04 0.4% -0.5% 0.0% -4.9% -2.3%
         
Average 0.0% 0.5% 1.0% 3.1% 3.1%
% Positive 56% 67% 56% 78% 67%

 

Unlike the last reversal we looked at, there wasn't a big edge here, especially on the downside.  The worst performance was 2 days later (not shown) with the S&P down 5 times and up 3 times.  After that, it was more positive than anything.

 

Many, many times over the years we've looked at reversal patterns that got a lot of attention for being "textbook", but when we tested them they were mediocre indicators at best.   It looks like yesterday's fits that category - maybe a bit bearish for the very short-term, but nothing much beyond that.

 

 

FOMC Meeting

 

Over the past three or four years, trading patterns surrounding FOMC decisions have become a very popular topic.  Perhaps because of that (or just a statistical fluke...), the patterns seem to be getting more consistent.

 

With the next official FOMC announcement looming on Wednesday, the table below shows how the S&P has fared in the days surrounding scheduled meetings for the past two years.

 

Date

Day

Before

Day

Of

Next

Day

Next

Week

06/25/08 -0.2% 0.5% -2.9% -4.5%
08/05/08 -0.9% 2.7% 0.4% 0.7%
09/16/08 -5.0% 1.6% -4.4% -2.3%
10/29/08 12.5% -1.3% 3.7% 3.3%
12/16/08 -1.5% 4.6% -1.0% -6.0%
01/28/09 1.0% 3.9% -3.3% -4.8%
03/18/09 2.8% 2.1% -1.4% 1.6%
04/29/09 -0.6% 2.0% 0.1% 5.5%
06/24/09 0.2% 0.9% 2.1% 2.4%
08/12/09 -1.5% 0.9% 1.1% -0.5%
09/23/09 0.7% -0.8% -1.4% -0.6%
11/04/09 0.3% 0.5% 1.6% 4.7%
12/16/09 -0.4% 0.2% -1.0% 0.5%
01/27/10 -0.5% 0.7% -1.4% 0.2%
03/16/10 -0.1% 0.8% 0.5% 0.9%
04/28/10 -2.3% 0.8% 1.3% -2.2%
       
Average 0.3% 1.3% -0.4% -0.1%
% Positive 38% 88% 50% 56%

 

The day of the announcement has been exceptionally positive, closing higher every time but twice.  There were only 3 days that showed a maximum intraday decline of more than -1%, but 11 days had a maximum gain of more than +1%.  The last five times, the max loss averaged a lowly -0.2% while the max gain averaged +1.0%.

 

The last four instances, the S&P dropped the day before the meeting, then rose the day of.  It pretty much just chopped in the day(s) following.

 

 

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Equity Market Indicators

 

Notes:

In mid- to late-May, we saw as many as 40% of our indicators at a bullish (for the market) and as little as 0% at a bearish one.  That was the widest spread since March 2009, though it has gotten as high as 50% - 70% at some of the true panic lows over the years.  We certainly saw enough extremes for a tradable bottom - just not a maximum reading.

 

Now that the market has recovered somewhat, we're getting a big spike in short-term bearish readings, but still have some lingering intermediate-term bullish ones as well.  If all plays out according to theory, then we should see a short-term dip followed by another push higher.

 

More history:   Short-term Score     Long-term Score    Indicators At Extremes

 

 

* New extreme

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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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