Short-term Outlook (1-5 Days):  Neutral (from 10/07 at 115.45)

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Equity Indicators - Updates and Extremes

Rydex Traders In The Nasdaq 100

On Monday, we took a look at "smart money" traders in Nasdaq 100 (NDX) futures, which had just gone more net short that index than any other time in the past decade, and by a large margin.

The other handful of times we'd seen them become excessively short the index, the NDX had a very difficult time sustaining any upside.

Now we're seeing some evidence of the opposite sentiment from "dumb money" Rydex traders.  This is exactly the inverse of commercial hedgers in the futures market - when Rydex mutual fund traders show excessive optimism or pessimism toward something, that something usually turns tail and moves the other way.

Currently, those Rydex traders have put nearly 30 times more money into the long Nasdaq 100 fund than the inverse (short) Nasdaq 100 fund.

As we can see from the chart, the other two times we've seen such an extreme (and those are the only two in the past 8 years), the NDX quickly retreated.

The one possible saving grace here is that we're not seeing the same rush to be long in the Nasdaq 100 leveraged funds.  In both January and April of this year, the Leveraged Bull Ratio had jumped up to 4, meaning there was 4 times more money invested in the leveraged long fund than the leveraged short fund.  As of yesterday, that figure was sitting at a neutral reading of 2.1.

S&P 500 Performance During Earning Season When Sitting At A High

Also on Monday, we took a look at the S&P 500's performance during the last earnings season of the year.  Generally, the market did pretty well...unless sentiment was showing extreme optimism.

We don't have an overwhelming amount of evidence that that's the case, but we do have something of a price extreme.  Earnings season "officially" began yesterday, and the S&P 500 had reached a three-month high during the day.

The chart below shows the last two times that's happened:

It's pretty obvious from the chart that the S&P didn't do so well once earnings began rolling out in earnest (it also happened to coincide with an extreme in the Rydex data shown above).

The table below shows how the S&P 500 futures performed since their inception in 1982 when they had reached a three-month high on the day earnings season started.  The returns go through the end of earnings season, which averages about 27 trading days.

The results aren't very good.  In fact, they're quite poor, especially since 1987.  Since '87, the S&P managed to rally through earnings season only 3 out of 15 times, and sported a median return of -1.2%, with a medium maximum loss of -4.8% compared to a max gain of +1.4%.

This is kind of picking on it a bit, but we also did not see the Nasdaq 100 confirm the three-month high yesterday.  Looking at the instances above, there were four others where the NDX didn't confirm.  Those were April '87, October '88, April '98 and July '98.  The S&P's median return during those four seasons was -2.4%, negative each time, with a median maximum loss of -6.0% compared to a median maximum gain of +1.7%.

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