September 23, 2010, 7:45am EST   

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Thursday's Need-To-Know  

Smart / Dumb Money Confidence


* Usually, when stocks slip for two days following a FOMC meeting, it rebounds over the next couple of sessions.  That will be especially important given the proximity of technical support as the market gaps down this morning.


* Rydex traders have made a big switch out of Utilities and into Technology, but it's probably more like trader and not trader(s).  Technology funds now account for 21% of total sector assets, but again it's mostly due to that one fund and is likely not a contrary indicator.




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):  15% Long



Active Studies
Date Study Forecast
09/23 Multiple down days after FOMC UP

Summary:  We'll go 15% Long SPY at the current price of 112.65, and move back to Flat if it trades at 111.30 at any point.  (Please see the side note below for an explanation).  This is based multiple down days after a FOMC meeting and nearby technical support.


Detail:  Whenever the S&P 500 dropped the day of a scheduled FOMC meeting and did so again the following day, over the next 2 sessions it rallied 73% of the time (8 out of 11 instances) by an average of +0.5%.  The three times it didn't manage to rebound, it kept on dropping for at least another week (9/30/98, 5/11/06 and 8/11/10), so that's a caveat if we continue to fail here.  For what it's worth, there were two other times that it dropped those two days then gapped down at least -0.5% the next morning, as we're on track for today.  Both times, the S&P mostly halted the selling for a few days, and just chopped around (10/1/98 and 8/12/10).  Sentiment-wise, there isn't much of anything that stands out.  The Rydex Beta Chase Index and RSI Spread are uncomfortably high, especially since the market has been dropping, but that's mostly due to a surge in assets in the high-beta Internet fund (see below).  I don't like making excuses for indicators, but this seems less like a natural reflection of excessive optimism in the face of a declining market, and more like a large fund making an allocation change.  I've been noting for the past two days that Monday's breakout above resistance seemed like it would stick, but instead we've done nothing but drop since then and this morning we're right back at that breakout level.


Current SPY:  -0.77  at 112.65


The 4 Anchors:

1. Sentiment: 

     Mostly neutral

2. Studies: 

     Not much going on, slight positive bias

     after multiple down days after FOMC

3. Trend

     Positive above 112ish

4. Support/Resistance: 

     Nearby support at 112ish


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Intermediate-term Outlook (1-3 Months):  25% Long


Summary:  The breakout from 9/20 (should it hold) is confirmation of the bullish studies from late August.  If SPY closes under 111.30, we will move back to Flat.


Detail:  No change.



The 4 Anchors:

1. Sentiment: 

     Mostly neutral

2. Studies: 

     Conflicts between bullish studies in

     August and technical sell signals

3. Trend

     Positive above 112ish

4. Support/Resist:

     Nearby support at 112ish




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Equity Indicators - Updates and Extremes


Rydex Sector Assets


As I mentioned yesterday, there isn't a whole lot among our indicators that is at an extreme right now.  As you can see from the Indicators At Extremes, there are no bullish (for the market) indicators and just a handful of bearish ones.


There has been some movement in asset flows among the Rydex mutual fund sector funds, however.  I'm not sure if it was a single fund, but on Tuesday about $130 million flowed out of the Utilities fund and about $130 million flowed into the Internet fund.


It seems odd to me that a fund would switch from Utilities to the Internet, but I've seen odder things, and the fact that the dollar amounts are so similar is probably more than a coincidence.



Whatever the reason, Technology funds at Rydex now control more than 20% of total sector assets, thanks to that move in the Internet fund.  That's Technology's highest allocation since May 2009, and December 2004 prior to that.  But because this spike doesn't seem "organic", meaning a gradual increase in assets among the various tech-related funds, I'm not reading much into it.


Precious Metals dropped to 2nd place, but still have 20% of the assets.  That's down from more than 35% a couple of months ago and surprisingly has not picked up much at all despite the grind higher in Gold and Silver.


The Basic Materials fund now claims 11% of total assets, and it seems traders are betting that the fund can overtake its April highs, which it's threatening to do now.  Historically, when it gets this popular, the NAV of the fund funds to suffer over the next 1-2 months, however there was an exceptional period from mid-2007 through mid-2008 when it got up to 20% of total assets.  The gains in the fund weren't great during that time, but any weakness was quickly bought. 



On a side note:  Based on the feedback this week, there will be one last change to the procedure for determining the short- and intermediate-term Outlooks.  For something that's not overly important to most subscribers, I've spent an inordinate amount of time thinking about this and I've reached my point of maximum frustration.


We will never please 100% of the people, but there are some very good points being made in the survey, emails and comments.  Basically, nothing we've done so far in terms of the Short-term and Intermediate-term Outlook has met the needs of an acceptable number of subscribers.  Here are the takeaways for what's required:


1. It must be specific and able to be tracked.

2. It must be focused mostly on sentiment, less so on other technical factors.

3. It must change frequently enough to be useful, but not "too much" or "too little".

4. It should not be construed as trading advice, simply as a reflection of current conditions given the focused niche of this site.


Based on those, what we were doing prior to this week was more in line with what folks are looking for, but the Outlook didn't change nearly enough to be useful to most.  So...we're blending the two, with a mix of objective and subjective analysis (more the former than latter) to determine the Outlooks.


In order for the Outlook to be in line with what we're seeing on the site, and to be specific and accountable, from now forward we will use prices for the S&P 500 SPDR (SPY).  This gets perilously close to looking like trading advice, which it is not, but taking it as such is up to you and you're on your own if you do.  We'll deal with price gaps on ex-dividend dates as they occur.


Yes, we will use pre- and post-market prices at times.  And No, if you take a trade based off any of these changes, I will not give you specific advice on what to do next.



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Equity Market Indicators



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, and once again we saw almost immediate buying pressure.  Unfortunately, we didn't quite reach the kind of extreme we have previously before the market took off.  With the rally over the past 2 weeks, bearish indicators have climbed but haven't reached the 30% 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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