Risk Level:  5

Summary:  Stocks managed to climb higher yet again to end the month, once again with exceptionally low volume.

Monday's session will be difficult to gauge, due to the emotional response to the killing of Osama Bin Laden.  After the news leaked out, equity futures spiked higher and as I type continue to hold their gains.

This is similar to the reaction after the capture of Saddam Hussein (see below), when the S&P 500 gapped up about 1% at the next session's open.  Those gains quickly evaporated and it closed negative on the day.

After the death of Adolph Hitler, the S&P also saw some very short-term weakness.  After both events, however, the S&P rallied in the days following the immediate weakness.

Previous to this development, the S&P had put in what was a consistently troubling pattern - a narrow-range day at a 52-week high, with extremely low volume (at least 40% below the 50-day average).

Using the S&P 500 SPDR (SPY), previous instances led to a lower close within a week 13 out of 18 times.  Of the 5 times it didn't, the market sank almost immediately afterward except for once).  To add to the woes, the Nasdaq 100 lagged on Friday, which tends to add to the negative consequences.

Given the momentum study we looked at on Friday, the probability appears good for upside follow-through in the weeks ahead.  However, based on the questionable price pattern heading into the weekend, and the potential for a reversal of the emotional response to the killing of Bin Laden, the risk of chasing a large gap up opening is high, when looking at a time frame of the next 3-5 days.

Risk Level:  5 

Summary:  In mid-March, for the first time since September 2010, we were seeing more bullish (for the market) indicators than bearish ones, seasonality was positive, and price performance after mini-panics like we had just witnessed were very bullish when looking out over the next 1-3 months.

In late March and early April, we discussed several studies focused on an intermediate-term time frame, and they were bullish for equities (such as a rapid whipsaw in the 10-day Up Issues Ratio, an extreme in the 21-day Arms Index, 3 straight large gap up opens, and a breadth thrust buy signal, among others).

The biggest problem was that almost every time we've seen a panic-type low like March 16th, the S&P 500 went back down to re-test that low within 2 to 18 trading days, and yet stocks continued to power higher this time.

We've witnessed a few signs of excessive optimism in the past few weeks, such as a nearly 20-year low in bears among newsletters, a surge in optimism (again) among Rydex traders and nearly universal long positions among active investment managers.  That's not overwhelming evidence, but the Risk Level is once again back to 5.