June 29, 2010, 7:50am EST   

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Tuesday's Need-To-Know  

Smart / Dumb Money Confidence

 

* Buyers have limped in over the past few days, showing an unwillingness to take risk despite a market that held above support and was oversold.  Now neither condition exists as a supporting factor.

 

* While we have a couple of weeks to go, the WSJ was wondering if there was so much pessimism built in that stocks would rally during earnings season.  They may, but according to what we look at, the edge is not large.

 

 

 

The Dumb Money is 50% 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 June 24, 1067 SPX

 

 

 

Recent Studies:

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

 

Today's Update:  We will remain Neutral for now.

 

Why:  Late last week, the market came down to test (and briefly violate) what should have been support around 1067-1070 in the futures.  While wobbly, it ended up holding and we got a decent smattering of oversold indications that made it seem more likely that we'd get a short-term rebound than a failure.  And if we did fail, then it seemed almost assured that we'd close the big open gap from June 10th.  Buyers gave it enough of a shot yesterday to hold us above support, but once again the "rally" was extremely meek and has been completely erased this morning.  Not only did that support area give way earlier today, but stocks are already well on their way to closing the gap at 1050ish.  I suppose the best bet for bulls would be more weakness after the open to close the gap, then a rebound, but given the inability to rally off previous short-term oversold conditions last week, I'm not eager to try risking that strategy here.

 

Current S&P futures:  -15 points at 1056 

Sentiment:

Trend: 

Mostly neutral.

Stuck in a range again.

Sup / Res:

Other:

R: 1140; S: 1065

Nothing notable.

 

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Intermediate-term Outlook (1-3 Months):  Neutral  Since June 22, 1103 SPX

 

 

Today's Update:  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.  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 were willing to give the bullish outlook another shot.  On June 22nd the S&P fell back under its breakout level, so we're going to stand aside and see if it was "fake", or an ominous sign of a lack of buying interest.

 

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

 

Too Much Pessimism Heading Into Earnings?

 

In April, we took a look at how it has been difficult for stocks to maintain their upside momentum when the S&P is trading at a high as we enter earnings season.

 

Unless the market makes a miraculous recovery in the next two weeks, we'll certainly have a different scenario this time as we stumble into the next earnings season when Alcoa reports on July 12th.  So much so, in fact, that the Wall Street Journal wondered yesterday if pessimism is too high.

 

While a lot can happen in two weeks, it's a good question, so let's go back to 1969 and look for any other time we entered earnings season during a bull market (a rising 200-day moving average on the S&P) and at some point during the prior non-earnings season the Bull Ratio on the Investor's Intelligence survey had dipped under 55%.

 

 

Start

Date

Return

Max

Loss

Max

Gain

01/06/72 1.5% -1.8% 3.1%
04/05/73 -2.4% -2.9% 4.7%
10/05/78 -8.2% -11.3% 2.9%
01/05/79 -0.9% -2.6% 3.5%
04/05/79 -5.0% -5.4% 0.7%
10/04/79 -7.9% -10.1% 1.8%
01/07/80 10.4% -0.5% 11.5%
04/07/80 6.1% -1.2% 7.9%
07/07/80 4.7% -1.7% 6.3%
10/06/80 2.2% -4.9% 3.2%
01/07/81 -5.6% -6.9% 0.8%
04/06/81 -2.5% -3.9% 2.0%
07/07/81 4.0% -1.8% 5.4%
01/06/83 1.6% -4.3% 2.4%
10/04/85 7.7% -1.1% 7.7%
10/06/86 5.2% -0.6% 5.3%
10/06/88 -1.6% -1.6% 4.2%
01/06/89 4.2% -0.4% 7.1%
04/06/89 6.3% -0.3% 6.3%
07/07/89 5.6% 0.0% 8.1%
04/05/90 4.1% -3.8% 5.2%
07/06/90 -5.5% -7.4% 3.2%
01/07/92 -0.1% -2.4% 0.9%
07/07/92 2.1% -0.5% 3.9%
10/06/92 3.7% -1.2% 3.8%
07/07/93 1.4% 0.0% 2.0%
10/06/93 0.4% -1.4% 2.3%
01/06/94 0.7% -0.1% 3.4%
04/07/94 -1.4% -2.7% 0.7%
04/06/95 4.3% -1.0% 4.3%
07/07/95 0.6% -2.5% 1.7%
10/05/95 1.7% -1.9% 1.9%
01/05/96 7.3% -3.2% 7.5%
04/04/96 0.9% -4.8% 1.0%
10/04/96 4.3% -1.2% 4.4%
01/07/98 7.7% -5.3% 7.8%
10/05/98 14.3% -6.6% 15.5%
10/05/99 5.8% -5.2% 6.6%
07/10/06 0.1% -3.4% 2.0%
10/08/07 -7.3% -7.4% 1.5%
     
Average 1.8% -3.1% 4.4%
% Positive 70%    

Any random earnings season...

Average 0.8% -4.2% 4.3%
% Positive 57%    

 

Overall, the S&P's performance during earnings season was OK, sporting a positive return 70% of the time.  Since the 1980's, it has been even better due to multiple failures during the late 1970's.

 

Compared to any other random earnings season, these instances did well, with an average return more than double, much better consistency, and smaller maximum losses.

 

There were some nasty failures, though, including the most recent one right before the onset of the latest bear market.  The brief rise in pessimism we saw in August/September led to a quick jump to a new high right before the onset of earnings.

 

If we restrict the instances to those times when the S&P was trading near a multi-month low as we headed into earnings season, the figures actually didn't change that much.  Unlike what we looked at in April, there didn't seem to be a big contrarian edge.

 

Perhaps things will change in the first couple of weeks of July, though, and as we actually enter earnings season we'll be able to find something that would be more help.

 

 

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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.  Since then, indicators on both sides of the isle have settled into a more normal range, and currently we're not seeing many that are at either a bullish or bearish extreme.

 

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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