July 16, 2010, 7:30am EST   

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Friday's Need-To-Know  

Smart / Dumb Money Confidence

 

* Yesterday we got a trifecta of "good" news hitting about at the same time during the afternoon, and buyers rushed in.  That gave indexes like the Nasdaq 100 their 8th straight up day, the longest since March.

 

* Some of that buying pressure came in right at the same time, which pushed the TICK indicator to a new all-time record.  A remarkable net 53% of all stocks traded up from their last trade, something we've never seen before.  Historically, that has coincided with (very) short-term buying exhaustion.

 

 

 

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):  25% Bearish  Since July 15, 1083 SPX

 

 

 

Recent Studies:

 

 

Today's Update:  We will move to Neutral if the S&P 500 e-mini futures trade at 1104.

 

Why:  Yesterday we touched on a couple of Rydex indicators that had consistently (almost without fail) preceded short-term corrections when they together reached the kinds of extremes they did on Wednesday.  Finally we did see some pronounced weakness, falling below a previous day's low even, but then we got a steady stair-step higher into the close, with a rush of buying interest we've never seen in 21 years (see below).  This is very, very similar to the pattern we saw in July 2009 and March 2010, which should scare the bejesus out of any bear...or anyone who follows mean-reversion strategies in general.  In both of those instances, we saw a period of excessive pessimism, a thrust off the low, then a market that became short-term overbought and ignored every single signal that it should pull back.  Just like now.  There are, of course, reasons to continue to expect a pullback, including seasonality - the S&P has dropped the day of July option expiration 17 out of the past 28 years, and 20 of the past 28 years the day after expiry (however, the last four have been positive).  So we have a situation where the market is at resistance around 1100, overbought, and with negative seasonality.  Still, given the remarkable persistence of this rebound and days like yesterday, I have no interest in staying with a bearish bias if buyers continue to push.

 

Current S&P futures:  +3 points at 1094

Sentiment:

Trend: 

Overbought.

Neutral, back in a trading range.

Sup / Res:

Other:

Res: 1100; Sup: 1080

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.   In late May, we 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.  After a brief respite, June 4th's Payroll Report kneecapped the rally attempt and took us to a new closing low.  In the process, we've seen very oversold conditions and some give-up among Rydex traders and individual investors, so we'll be looking for the price action to improve to re-establish a bullish outlook.  That would include either a successful test of the recent lows, or a recovery high above 1120 to break the recent pattern of lower highs and lower lows in the S&P 500.

 

 

Recent Studies:

No Fidelity funds better than cash (7/06): Bullish

Rydex traders giving up (7/07): Bullish

AAII survey shows low bullishness (7/08): Bullish

Sentiment:

Trend: 

Back to mostly neutral readings.

Mixed long-term trend signals.

Sup / Res:

Other:

R: 1140; S: 1040

Nothing notable.

 

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Equity Indicators - Updates and Extremes

 

NYSE  TICK

 

The TICK indicator is simply the difference between the number of stocks traded on an exchange, say the NYSE, that last traded on an uptick minus those that last traded on a downtick.

 

So if the TICK is at +1500, that would mean that 2000 stocks last traded higher than their previous trade, while 500 stocks traded lower (2000 - 500 = 1500).

 

In practice, with about 3200 stocks traded on the NYSE on any given day, we rarely see the TICK exceed +/- 1400 or so.  The TICK is one of those indicators that can vary wildly depending on your quote vendor - for this discussion, I am using Bloomberg data back to 1989.

 

Yesterday, we saw something quite remarkable.  During the afternoon, we got a trifecta of ostensibly good news - BP said no more oil was flow into the Gulf, a source denied that Apple was going to recall the iPhone 4, and the SEC announced a press conference for later in the afternoon, which traders immediately (and correctly) assumed was a Goldman Sachs settlement.

 

All of the news hit at around the same time, and buyer orders rushed in all at once, as the TICK hit +1645.  That was a new all-time high, a 21-year record.

 

 

The table below shows the 20 days with the highest intraday TICK reading.  Notably, the next day was positive only 5 times, with only one of those days showing a gain greater than +0.5%.  So it seems that the all-in rush served to mark some kind of temporary buying exhaustion.

 

The table is ordered so that the highest TICK readings in history are at the top.

 

Date

TICK

1 Day

Later

1 Week

Later

2 Weeks

Later

1 Month

Later

07/15/10 1645        
09/18/02 1641 -3.0% -3.4% -4.8% 1.1%
06/11/10 1638 -0.2% 2.4% -1.4% 0.3%
03/21/07 1637 0.0% -1.2% 0.3% 3.4%
12/21/01 1599 0.0% 0.3% 1.4% -1.1%
06/12/07 1591 1.5% 2.7% 0.0% 3.7%
03/01/07 1579 -1.1% -0.1% -0.8% 1.3%
01/03/06 1563 0.4% 1.6% 0.7% 0.2%
07/02/03 1553 -0.8% -0.5% -1.2% -1.4%
03/28/07 1543 0.4% 1.6% 2.2% 5.4%
05/25/10 1541 -0.6% 2.3% -1.7% 0.0%
01/03/01 1538 -1.1% -2.5% 0.0% 0.1%
03/12/07 1529 -2.0% -0.3% 2.2% 2.3%
06/29/06 1524 -0.2% -0.6% -2.9% 0.3%
05/21/10 1519 -1.3% 0.2% -3.4% 0.7%
05/17/10 1517 -1.4% -5.6% -5.8% -2.0%
03/23/10 1510 -0.5% -0.1% 0.7% 2.9%
06/13/07 1509 0.5% -0.2% -0.6% 2.4%
03/14/07 1502 0.4% 3.5% 2.2% 4.7%
05/14/04 1493 -1.1% -0.2% 2.3% 3.5%
02/24/09 1492 -1.1% -9.9% -6.9% 5.3%
         
Average -0.6% -0.5% -0.9% 1.7%
% Positive 25% 40% 45% 80%

 

Of course, over the years the number of issues traded on the NYSE has changed, so a +1500 TICK today doesn't mean the same as it would have in 1990.

 

But if we normalize the TICK for the number of issues traded, yesterday's extreme still stands out as the all-time greatest, with a net of more than 53% of all issues trading on an uptick.

 

There were two other dates that saw more than 50% trade on an uptick, 1/2/90 and 6/11/10.  The former top-ticked a major rally, and the S&P slid nearly 9% over the next month.  The latter instance, occurring earlier this month, led to a couple of more days of rallying before the S&P essentially topped out.

 

From 2002 onward, the TICK has had a fairly steady trading range, with +/- 1500 marking the upper and lower limits for all practical purposed.  Prior to 2002, there were only 3 days when the TICK was greater than 45% of all issues, 1/2/90, 5/31/91 and 1/3/01.

 

We already discussed the first one.  The one in May '91 happened to also top-tick a major market rally, and the S&P lost about 5% during the next month.  In '01, stocks fell hard for the next 3 days, then meagerly scrambled higher before rolling over again.

 

The moving averages of the closing TICK level that we watch are not currently at an extreme, and the table above doesn't show any particularly bearish edge after a few days, so I'm not reading much into yesterday's record other than a likely short-term buying exhaustion.

 

 

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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.  On June 29th, we got another spike in bullish indicators above the 30% level...but again it's below what we've seen at many of the prior major lows.

 

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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