September 17, 2010, 7:45am EST   

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Friday's Need-To-Know  

Smart / Dumb Money Confidence

 

* While prices haven't gone much of anywhere on a closing basis for a few days, our indicators have gently receded from overbought conditions.  A breakout (and hold) would be an obviously positive technical development, though seasonality-wise there are some strong headwinds in the short-term.

 

* Investors continue to yank money from equity mutual funds, despite positive market performance.  The degree to which this has happened over the past three weeks is extremely rare.

 

 

The Dumb Money is 54% 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 27:  S&P 500 rebound at 1040 support
 
 

  Bearish For The Market

Sep 15:  Resistance at 1130ish
 
 
 

 

Today's Update:  We will remain Neutral.

 

Why:  The past couple of days didn't resolve much of anything from a technical or sentiment perspective, as we saw gaps down and then intraday recoveries both days, neither of which was able to shake us out of the trading range.  That activity has lessened the short-term overbought indicators we entered the week with, and most of our guides at this point are neutral (in the short-term).  We do have option expiration today, which has had a decidedly negative bent in the days following.  The last 7 times the S&P futures gapped up at least +0.25% on September expiration, it was negative through Monday's close.  Forgetting about September for a minute, if the futures gapped up that amount to a one-month high on any expiration morning, they were negative through Monday the last 11 times.  From the close of September expiration through Monday's close, the futures were positive only 4 out of 20 times since 1990, and 5 out of 20 times through Wednesday's close.  It goes back to what we looked at earlier this week about the worst seasonality of the worst month right around this time.  Seasonality is nothing more than a mild breeze for or against the market, and right now it's blowing against.  Still, should the S&P managed to gap to a new high and then hit a higher intraday high after the first hour, the probability of a downside reversal later in the day decline substantially, particularly if the opening gap is larger than +0.5% or so (it was earlier this morning, but has faded since).

 

Current S&P futures:  +4 points at 1126

----------------------------------

Sentiment ():  Neutral

Trend ():  Stuck in a trading range

Support/Resistance ():  1040/1130

Other ():  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.

 

Why:  During the market's breakdown in early July, we saw a number of examples of excessive pessimism, such as deeply oversold conditions, and give-up among Rydex traders and individual investors.  After sentiment recovered from that during a 10% rally, we saw some encouraging signs, such as the advance/decline line making a new all-time high.  But indexes like the S&P 500 remained mired in a pattern of lower highs and lower lows, so price action was dubious.  Since then, we saw some worrisome signs, some of which the media has grabbed onto, like the Hindenburg Omen.  Now stocks are threatening to break down under support.  There is anecdotal evidence of too much pessimism once again (mainstream press about mutual fund flows into bonds instead of stocks, firms rolling out "fat tail" funds, and celebrities warning about pending market crashes and advising the masses to stay away from stocks).  Lately, some of our indicators have started to reflect that, including a dearth of money in leveraged long funds at Rydex, investors clamoring for "fear trade" currencies and individual investors dropping to near multi-year lows of bullishness.  A breakout, and hold, of the recent range would give more confidence to the idea that that pessimism will once again be ill rewarded.

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Sentiment ():  Mostly neutral

Trend ():  Mixed int-term trend

Support/Resistance ():  1040/1130

Other ():  Nothing notable

 

 

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Equity Indicators - Updates and Extremes

 

Mutual Fund Flow

 

Earlier this month, we took a look at the flow of funds into equity mutual funds.  Or the flow out of them, more accurately.

 

Despite great gains in stocks over the past few weeks, investors continue to act snobbish towards those funds, with net outflows during each of the three weeks.

 

 

Let's go back over the past eight years and look for any other time that the S&P 500 rose for three consecutive weeks (this data uses Wednesday-to-Wednesday closes) while at the same time investors yanked funds out of equity funds every one of those weeks.

 

Date

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

08/02/06 -1.0% 1.3% 2.0% 8.1%
12/20/06 0.2% -0.5% 0.5% -2.6%
05/30/07 -0.9% -1.0% -1.6% -4.3%
12/12/07 -2.3% 0.7% -5.2% -10.3%
07/30/08 0.4% 0.1% -0.2% -30.2%
08/06/08 -0.3% -1.1% -1.1% -27.9%
12/30/09 1.0% 1.7% -2.6% 3.7%
       
Median -0.3% 0.1% -1.1% -4.3%
% Positive 43% 57% 29% 29%

 

Surprisingly, there wasn't much of a contrary nature to the data.  One would assume that if the market managed to rally while money left equity funds, that returns going forward would be positive as they realized their mistake and started buying again.  No evidence of that here, though of course the sample size is excruciatingly small.

 

What's also notable is that there is a net outflow from the funds over the past several weeks in spite of a healthy gain in the S&P.  So now let's look for any time the S&P rallied more than 5% during a few weeks' time while there was a net outflow from equity funds during that run.

 

Date

Rally

Outflow

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

12/10/08 11.5% (16,798.00) 0.6% -3.5% 0.8% -20.7%
08/14/02 9.0% (16,500.00) 3.2% -0.2% -1.1% 0.4%
03/25/09 14.2% (14,316.00) -0.3% 1.4% 3.6% 11.9%
10/30/02 14.7% (9,080.00) 3.7% -0.9% 2.5% -1.4%
03/19/03 5.6% (7,200.00) -0.5% 0.8% 0.7% 14.1%
04/01/09 12.4% (6,819.00) 1.7% 5.1% 7.7% 11.1%
10/23/02 8.2% (6,425.00) -0.6% 3.1% 2.0% 2.5%
09/15/10 6.6% (5,998.00) - - - -
11/06/02 7.4% (3,315.00) -4.5% -1.0% -0.7% -6.4%
11/18/09 6.4% (1,770.00) 0.1% -0.1% -0.1% -3.8%
11/25/09 6.1% (1,394.00) -0.1% -1.3% 0.9% -1.0%
09/23/09 6.6% (1,078.00) -0.4% -0.6% 1.9% 4.6%
           
  Median -0.1% -0.2% 0.9% 0.4%
  % Positive 46% 36% 73% 55%

 

Again, nothing to write home about.  At least this time, a month later the S&P was positive most of he time.  The three times it showed a negative return, they were all fairly insubstantial.

 

This data adds to a somewhat confusing sentiment picture.  We're not seeing much buy-in of the rally in terms of mutual fund flows, or Rydex mutual fund traders, or small options traders, among others.  But other data shows some quick flipping into the bullish camp, such as the AAII sentiment survey we looked at yesterday.  Given the mixed picture, a technical breakout in indexes like the S&P 500 probably has a better chance of holding longer-term.

 

 

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Equity Market Indicators

 

Notes:

In late August, we got a spike in bullish (for the market) indicators near the 30% level, similar to what we saw in late May and late June.  Over the past two years, moves above that 30% level have been met with almost immediate buying pressure in the market, and once again that happened.  Unfortunately, we didn't quite reach the kind of extreme we have previously, before the market took off.  Now we have about an equal number of bullish and bearish extremes, and neither are near an important threshold.

 

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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