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Morning Report                                                                November 5, 2010, 7:40am EST


Short-term Outlook  |  Intermediate-term Outlook  |  Updates & Studies  |  Indicator Summary

Friday's Need-To-Know  

Smart / Dumb Money Confidence


Trading was semi-giddy yesterday as most equity indexes, and a huge number of stocks, pushed to new 52-week highs.


This may be quaint given our new Fed-manipulated environment, but historically when we've seen such a spike in new highs, the market rested over the next couple of weeks at least.


The price pattern yesterday was about as impressive as they come.  The last 16 times we've seen a similar feat, though, the market pulled back almost without fail.



The Smart Money is 38% confident in a rally.

The Dumb Money is 63% confident in a rally.


Smart/Dumb Confidence

 (click chart for larger version)



Short-term Outlook (1-5 Days):  20% Short (from 11/05 at 122.00)



Active Studies
Date Study Forecast
10/14 Fed POMO activity UP

See a list of retired studies


Summary:  We're moving to 20% Short based on yesterday's price pattern and surge in sentiment.  We'll move back to Neutral if SPY subsequently trades above 124.10.


Detail:  Don't fight the tape.  And don't fight the Fed.


Those two choruses were chanting their mantras loudly yesterday, and for good reason.  It seems clear the rally was predicated on the Fed's astoundingly naked admission of market manipulation, and most equity indices broke to multi-month or even multi-year highs.  Hallelujah.


I'm being something of a sore loser at the moment, as I'm still trying to get my head around our Federal Reserve chairman stooping to the point of writing an OpEd piece to whine.  It reminded me of the explanatory essays we used to make our boys write when they did something bad.  This is truly a most unique moment in American financial history.


Anyway, we have to deal with the cards dealt us, and I guess it's entirely possible that from now 'til June it's going to be as simple as gaming the amount of the next Fed injection.  We can guess all day long whether that's already built into the market, but obviously that's not the case yet.


Assuming any shred of historical data works any more, there were a bunch of warning signs that triggered yesterday.


*  The ISE Equity-Only Put/Call Ratio jumped above 240 (meaning traders bought to open 240 call options for every 100 put options).  When it soared that high with the S&P trading at at least a 3-month high, then the next two days were up 35% of the time (as opposed to 51% of the time when the ratio wasn't that high).  It gained more than +0.5% only 2 times, but lost more than -0.5% 6 times.


*  The Smart Money Index dropped to a one-year low at the same time the S&P rose to a one-year high.  Since 1998, that has resulted in a positive return over the next few days 36% of the time with an average return of -0.8%.


*  If we look at times new highs on the NYSE spiked this much (see below) when the S&P 500 was also trading at a new 52-week high, then the next day the S&P was up only 34% of the time.




I mentioned yesterday that we'd maybe flip the Short-term Outlook to modestly bearish if we rallied up to 112ish, and saw a spike in our sentiment guides.  We saw both yesterday.


This could be laughably misguided, but we're moving to 20% Short.  Given that most of the instances never traded more than 1.5% above the closing price using the table below, we'll turn back to Neutral if SPY trades at 124.10 or higher.  The Payroll Report is this morning before market open, so that could easily make or break this idea depending on how traders interpret economic data from this point forward.


Current SPY:  -0.26 at 122.00


The 4 Anchors:

1. Sentiment: 

2. Studies:

3. Trend:

4. Sup/Res:


Support at 118.00 and 116.00

Resistance at 122.00ish



Intermediate-term Outlook (1-3 Months):  Neutral  (from 10/14 at 116.75)


Summary:  Due to a recent spike in the number of bearish studies and seasonal patterns, we're going to stand aside and see if this uptrend can continue or (more likely) start to falter.


Detail:  No change from October 15th.


The 4 Anchors:
1. Sentiment:  2. Studies:
3. Trend: 4. Sup/Res:



Top  |  Short-term Outlook  |  Intermediate-term Outlook  |  Updates & Studies  |  Indicator Summary



Indicator Updates and Studies


NYSE New Highs


Behind the advance/decline numbers, the most commonly-referenced breadth figures that analysts use are the number of new highs and new lows, usually over the past 52 weeks.


According to the textbooks, the greater the number of new highs, the more healthy the market, especially if that number is expanding over time.


The textbooks, then, should be cheering yesterday's performance.  The S&P 500 broke to a new high and was pushed along by over 18% of the issues trading on the New York Stock Exchange.  That's the greatest percentage since April.


But April wasn't exactly the best time to be sucked into buying stocks, and it turns out that's not uncommon when we see such a jump in the percentage of new highs.



The table below shows every time since 1962 that the number of issues trading at a 52-week high exceeded 18% of total issues.



A few times, such as 1982, 1986, and 2003, such an event was cause for celebration as the textbooks nailed the analysis.  Stocks chugged higher pretty much without interruption.


But more common was a gimpy market that struggled to maintain its momentum.  Outside of the three time periods mentioned above, the S&P sported a negative return 7 of remaining 10 times two weeks later.


Six months later, the S&P was up by an impressive amount after the three exceptions noted above.  But the other instances showed a median return of -0.9% six months later, with only one greater than +5%.


Overall, the returns were in line to slightly below random across all time frames except one month later when it was modestly above average.  There were still four losses greater than -2%, and two gains less than +1%, but the other 8 were solidly positive.


While not shown on the table, 12 of the 14 instances sported a positive return one year later (assuming positive returns for the last two instances in March and April of this year).  Overall, though, the median return was only +5.4%.  Five of the dates gave returns greater than +10% and three greater than +20%.


I would not consider this to be a sell signal, although it would have worked better that way in April (and January 11th when we saw a spike to 17.4% of total issues that just missed the cutoff for the table above).  But I sure as heck am not cheering this development as a major buy signal, at least for the short- to intermediate-term. 



S&P 500 Price Performance


The markets were firing on all cylinders yesterday (unless you look at anything dollar-denominated of course).  The pattern couldn't be more pretty for bulls - a large gap up, a new multi-month high, and enough buying pressure to close the S&P above its opening price.


With the S&P looking so good, let's see how it performed after similar setups.  The table below shows the S&P's performance over the next two weeks when the S&P 500 SPDR (SPY) gapped up on the open and never filled the gap (i.e. it never traded below the previous day's close), it closed higher than the open and at at least a six-month high.



Out of 16 occurrences since 1998, it managed to climb higher only twice.  And one of the positive occurrences (12/01/03) showed a maximum loss that was nearly three times greater than the maximum gain as the market fell back then jumped right before the two weeks was up.


Prior to 1998, it wasn't nearly as bearish.  There were another 12 occurrences, and it was higher two weeks later 9 of those times.  The median return was modest, +0.8%, but at least the average maximum gain (+1.9%) was well above the maximum loss (-0.6%).


Top  |  Short-term Outlook  |  Intermediate-term Outlook  |  Updates & Studies  |  Indicator Summary



Equity Market Indicators



After spending the past two months gradually increasing, the number of our indicators that are bearish for the market jumped over 40% of total indicators on November 5th.  That's the highest ratio since April 14th (12/23/09 and 05/15/08 before that).  While the ratio has gone higher than 50%-60% in the past, a surge above 40% has resulted in below-average future stock performance.  In particular, future short-term gains tend to be temporary.


More history:   Short-term Score     Long-term Score    Indicators At Extremes



Indicators At Extremes



STEM Model

STEM.MR Model - S&P

Price Oscillator - S&P

Intraday Cumulative Tick - NYSE

Intraday Cumulative Tick - NASDAQ

Up Issues Ratio - NYSE

Up Issues Ratio - NASDAQ

Up Volume Ratio - NYSE

Down Pressure - NDX

Down Pressure - S&P

Put/Call Ratio - Equity Options Only

Put/Call Ratio - Total of All Options

Put/Call Ratio - Total of Moving Averages

Composite Model

Stock/Bond Ratio

Rydex Bull Fund Asset Flow


Up Volume Ratio - NASDAQ

VIX Transform

NH/NL Ratio - NYSE


Options Speculation Index

Fidelity Sector breadth

Sentiment Survey - NAAIM

Sentiment Survey - AAII

Sentiment Survey - Investor's Intelligence

AIM Model

InsiderScore Buy/Sell Ratio

Hedger positions in the Nasdaq 100



Rydex Bull/Bear RSI Spread

Put/Call Ratio - OEX Options Only

Put/Call Ratio - OEX Moving Averages

Put/Call Ratio - OEX Open Interest Ratio

* New extreme

See all indicators


Jason Goepfert

Founder, Sundial Capital Research, Inc.


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