August 19, 2010, 7:45am EST   

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Thursday's Need-To-Know  

Smart / Dumb Money Confidence


* For the second day in a row, stocks closed near the bottom half of their intraday range after an early rally.  While ugly on a chart, such a pattern hasn't necessarily been a good sell signal historically.


* Options traders don't seem to fear it, as they bought an exceptionally high number of call options relatively to puts yesterday.  That kind of extreme, while certainly influenced by the pending expiration, has not been market-friendly...especially if we see a cluster of them.


* Corporate insiders (usually the smart money) are also apparently eager to buy, with the Buy/Sell Ratio recording its best level since March 2009.




The Dumb Money is 46% confident in a rally.

The Smart Money is 50% confident in a rally.


Smart/Dumb Confidence

View longer history



Short-term Outlook (1-5 Days):  Neutral  Since July 20, 1057 SPX




  Bullish For The Market

Aug 16:  Five down days into a Monday
Aug 12:  TRIN > 6.0

  Bearish For The Market

Aug 19:  Too much call buying
Aug 17 & 18:  S&P 500 failure at 1100


Today's Update:  We will remain Neutral.


Why:  Another day, another big late-day fade in stocks.  For the second day in a row, we saw some heavy selling pressure during the last hour of trading.  Like we went over yesterday, though, historically there isn't much that's bearish about such a pattern.  Over the history of the S&P 500 SPDR (SPY), there have been 25 times when it rallied at least +0.75% during the day, then closed in the bottom part of the day's intraday range.  19 times (76% of the time), it closed higher the next day, and lost more than -1% only 2 times (none since 1999).  The stats become less bullish the longer out we look, but are still either comparable or slightly better than random.  Nothing I would use as a buy signal, per se, but I can't find any indication that the fading intraday buying pressure is a sell signal, either.  Possibly more troubling is the spike in call option buying that we saw yesterday (see below).  Yes, option expiration is looming and that no doubt is playing havoc with the numbers, but that's something we deal with every month.  We still have some bullish bias from the studies we looked at earlier in the week, though those are about to run out.  Bottom line, it still looks OK for a further short-term rally (not great, but OK)...we just need to get over the 1100 hump on the S&P, which has been a major trouble spot for the past two days.


Current S&P futures:  +4 points at 1091


Sentiment ():  Mostly neutral

Trend ():  Stuck in a trading range

Support/Resistance ():  1065/1100

Other ():  Option expiration week


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



Today's Update:  We will remain Neutral.


Why:  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.  But after just a brief respite, June 4th's Payroll Report kneecapped the rally attempt and took us to a new closing low.  In the process, we saw very oversold conditions and some give-up among Rydex traders and individual investors.  In early July, we saw even more evidence of excessive pessimism.  The big missing piece, though, was the price action - the S&P was making a clear series of lower highs and lower lows, which muddled the risk/reward of stepping in and buying into those pessimistic conditions.  The market has obviously recovered well from there, and with the advance/decline line making a new all-time high, things were looking brighter for stocks.  But August 11th's knock-down gave us the potential for a failed break of important resistance, and we're back to being stuck in a longer-term trading range.


Sentiment ():  Mostly neutral

Trend ():  Mixed int-term trend

Support/Resistance ():  1040/1140

Other ():  Bullish studies from July


  Bullish For The Market

Aug 3:  A/D Line makes a new high
Jul 8:  Extremely low AAII bullish %
Jul 7:  Low Rydex Ratio
Jul 6:  No Fidelity Sector funds beating cash

  Bearish For The Market

Aug 13:  Hindenburg Omen triggers


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Equity Indicators - Updates and Extremes Buy / Sell Ratio


After meandering around with no particular direction, corporate insiders have decided to pick up their buying.


According to, those most in the know about their companies' prospects have started to buy notably more stock than they're selling.  The result is the most extreme Buy / Sell Ratio since March 2009.



Obviously, that looks like it would be a good sign for the market.  Perhaps it's good news that despite the S&P being nowhere near May's lows, insiders are already more eager to buy now than they were then.


While the spike in insider selling a year ago didn't presage any kind of decline and was a wickedly false signal, for the most part extremes in insider activity have been a very useful guide.


So that leads us to the question of whether this week's reading really is at an extreme.  Surely, we're seeing the most buying (relative to selling) in a year and a half, which is probably good news...but if we zoom out, then it becomes obvious that buying is nowhere near previous extremes.



The current reading of 0.1 is just barely better than neutral.  In order to see a truly bullish extreme, the ratio would need to get to at least 1.0, and preferably 2.0.  Based on insiders' history, it's going to take a long time and/or a major decline in the market to generate that kind of buying interest.



ISE Sentiment Index


A while back, the ISE Exchange broke out their aggregated options data between options traded on equities and those traded on indexes and ETFs.  That made their data more useful, since index data tends to be less effective as a contrary indicator than equity-only data.


Yesterday, there was a wide disparity between the two.  Granted, this is likely due to option expiration games as we near the September expiry, but still it's worth taking a peak at prior times we've seen this occurrence.


The ISE expresses its data as a call/put ratio, and yesterday the equity-only ratio was an exceptionally high 256 (meaning that 256 call options were bought for every 100 put options).  At the same time, the index-only ratio was a lowly 29, meaning that only 29 calls were bought for every 100 puts.



At its most-basic level, that would suggest that equity traders were extremely bullish while index traders were extremely bearish.


The difference between the two of 227 (256 - 29) is abnormally large.  The table below highlights the S&P 500's performance going forward after other times the difference exceeded 225.



1 Day


1 Week


2 Weeks


1 Month


01/05/06 0.8% 1.1% -1.1% -0.6%
02/28/06 0.9% -0.2% 1.5% 1.4%
03/22/06 -0.2% -0.3% 0.5% 0.6%
04/06/06 -1.0% -1.7% 0.2% 1.1%
11/09/06 0.0% 1.6% 1.6% 2.6%
05/07/07 -0.1% -0.3% 1.1% 0.6%
06/01/07 0.0% -2.0% -0.7% -1.5%
06/04/07 -0.4% -1.8% -0.8% -1.1%
06/15/07 -0.1% -1.7% -1.7% 1.1%
06/22/07 -0.5% -0.1% 1.6% 0.5%
07/05/07 0.5% 1.5% 1.9% -5.5%
07/10/07 0.7% 2.5% 0.3% -0.7%
07/12/07 0.3% 0.4% -4.1% -6.3%
10/08/07 0.9% 0.0% -2.9% -1.9%
10/29/07 -0.7% -2.7% -6.8% -4.5%
04/15/10 -1.6% -0.2% -0.4% -6.1%
Average 0.0% -0.2% -0.6% -1.3%
% Positive 50% 31% 50% 44%


In the very short-term, there didn't seem to be much of an impact.  But when we look out over 3-5 days, that's when we see that it was difficult for stocks to maintain much upside.  While the declines weren't necessarily large, they were consistent, and when there were gains, they were almost invariably given back.


Usually, the extremes clustered in a group during a two-three week time frame, and that is what preceded several of the most significant recent declines.  So this will be something to watch in the weeks ahead, to see if we get more readings like we saw yesterday.



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Equity Market Indicators



On June 29th, we got another spike in bullish (for the market) indicators above the 30% level, similar to what we saw in late May.  Once again, it wasn't quite a spike in extremes like we've seen at other major lows, but it was apparently enough for the buyers to step in, as we've rallied well since then.  While the percentage of our indicators at a bullish extreme have understandably drifted lower in response, oddly so has the number of bearish ones.  We have seen few of our indicators reflect too much optimism in the rally thus far.


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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