Morning Report - March 31, 2011

Morning Report for Thursday, Mar 31, 2011

Archive Posted 03/31/11 1:30 AM ET by Jason Goepfert

Top Stories In Sentiment		Smart / Dumb Money Confidence
The superlatives for stocks continue to add up, as it rolls over short-term negatives. This might be getting old, but a market that bucks such short-term odds tends to continue to rise during the next 1-3 months. Some of our shorter-term guides have reached their most extreme levels in two years or more, but most of the longer-term ones remain muted. Even the noisy AAII survey of individual investors didn't show much of a bump up in optimism this week. The most positive indications for the market right now involve breadth. We now have another kind of buy signal in the form of the quick oversold-to-overbought move in the Up Issues Ratio, which has led to a positive one-month return every other time it's occurred since 1940.		Risk Level: 4 (Moderate-Low) The Smart Money is 50% confident in a rally. The Dumb Money is 63% confident in a rally. (click chart for larger version)

Short-term Outlook (1-5 Days)

Active Studies:

03/21: Usually see a re-test of panic lows Negative

See a list of retired studies

Risk Level: 7

Summary: I used the adjective "incredible" to describe stocks' resiliency yesterday, and I'm not sure what's superlative to that, but whatever it is, it's what I'd use now.

We started off with a large gap up opening, and once again there wasn't much of an intraday fade from that early stampede.

The bearish setups from late last week have pretty much completely failed, adding some luster to the longer-term positives. A market that emerges from oversold conditions like after the Japanese tragedy that doesn't budge in the face of short-term overbought conditions very often has even more gains in store during the next 1-3 months.

Perhaps we're once again in one of those la-la periods where nothing matters but the underlying bid underneath the market, but because of a preference for funds like Telecom and general distaste for funds like Utilities, the Rydex Beta Chase Index has surged again. Traders in that family of mutual funds are now 7.4 times more likely to trade a "risky" fund than a "safe" one, the highest short-term speculative jolt since March 23, 2009. Even then, during the kickoff of this great bull market, the S&P pulled back for a week.

This is the first time in five years that the Beta Chase has been above 4 for three days in a row, and the RSI Spread has also been above 90 during that same span. All but one of the others led to either a short-term pullback or a failed rally attempt (3/20/03, 6/4/03, 9/4/03, 5/28/04, 11/2/04 and 3/21/06).

Longer-term, things continue to look good. We're seeing several kinds of (mostly breadth-related) buy signals, but on a sentiment basis there hasn't been too quick of a buy-in among investors. Even the normally quick-triggered AAII survey didn't show much of a bump up in optimism in the latest survey.

Same as yesterday, we still have at least modest short-term overbought conditions in some of our more sensitive sentiment guides. But unless we happen to drop back under 1300 on the S&P 500, it's really hard to have much confidence in any kind of meaningful pullback.

Intermediate-term Outlook (1-3 Months)

Risk Level: 4

Summary: No change from March 21st.

Active Studies:

03/31: Rapid whipsaw in 10-day Up Issues Positive

03/25: Extreme in 21-day Arms Index Positive

03/23: 3 straight large gap up opens Positive

03/22: Breadth thrust buy signal Positive

03/21: Mini-panic selling washout Positive

03/09: Bullishness in "fear trade" currencies Positive

02/08: Surge in Penny Stock volume Negative

02/08: No divergence in Advance/Decline line Positive

02/01: Low mutual fund cash levels Negative

11/30: "Best 6 months" after up Sept/Oct Positive

10/14: Fed POMO activity Positive

See a list of retired studies

Charts Of Interest

Chart: NYSE Up Issues Ratio

We've looked at some thrusts in breadth over the past couple of weeks (see here and here). They just keep coming.

One of the most egregious extremes among our indicators right now is the 10-day average of the Up Issues Ratio on the NYSE. Over the past two weeks, an average of nearly 64% of all issues on that exchange have closed in positive territory each day.

That is quite a turnabout from a couple of weeks ago, when the ratio was less than 41%. Dating back to 1940, it's only the 11th time this has happened so quickly.

The table below highlights each of the other instances.

One month later, every instance was positive. Six months and one year later, there was one (minor) loss each, but overall the returns and consistency were impressive.

During the next year, the maximum the S&P lost at any point averaged -6.4%. The maximum that it gained at its best point averaged +26.3%. That's quite a positive skew.

We've often mentioned the potential pitfalls of using breadth indicators during the past couple of years (the increasing role of high-frequency trading and the proliferation of ETFs being two main culprits), but I think those issues are dissipating somewhat, especially the former.

I'm not quite as fond of using breadth indicators as a crutch as a I used to be, but it would be a mistake to distrust them completely. This looks like a solid positive for the market in the intermediate- to long-term.

General Equity Market Indicators

In mid-March, for the first time since September we had more bullish (for the market) than bearish indicators, though the former didn't quite reach enough to be considered extreme (which is typically a good buy signal for the broader equity market). Still, the market took off to the upside, and as of the end of March we had 0 bullish indicators for the first time since the market peaked in February. That's not normally a good sign, but one redeeming quality is that the percentage of bearish (for the market) indicators has not hit the extreme level of 30% or more.

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

Indicators At Extremes

Bearish for equities	Bullish for equities
* NH/NL Ratio - NYSE * Up Volume Ratio - NYSE * Up Volume Ratio - NASDAQ * Fidelity Sector Breath Up Issues Ratio - NYSE Up Issues Ratio - NASDAQ Rydex Beta Chase Index Rydex Ratio Put/Call Ratio - OEX Options Only Rydex Bull/Bear RSI Spread VXN VIX Options Speculation Index Sentiment Survey - Investor's Intelligence NYSE Available Cash Dumb Money Confidence
* New extreme See all equity indicators

Sector Sentiment

The pullback from the February highs hit some sectors harder than others, like usual, and the hardest hit in terms of overbought/oversold are Housing and Technology. Utilities were also hit, due to the nature of the Japanese tragedy. Most of the sectors have bounced since the 3/16 lows, and have a bit further to go before they would reach "maximum" oversold territory.

See sector breadth charts

Currency / Commodity Sentiment

Commodities in general have finally seen a moderate pullback, but it hasn't impacted the sentiment numbers too much just yet. The "soft" commodities have seen sentiment shift the most, becoming more neutral after quite a while in "excessive optimism" territory. The US Dollar and Natural Gas remain the most-hated among alternative assets.

See all currency/commodity indicators

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