Morning Report for Wednesday, May 18, 2011
Previous Report    Print    Archive                                                 Posted 05/18/11 2:25 AM ET by Jason Goepfert



Top Stories In Sentiment


Smart / Dumb Money Confidence


Tuesday's trading occurred mostly below technical support, but overall the day didn't make a definitive case that support has broken.  It's still the #1 focus among most traders, and probably should be given some of the negatives we've discussed.


One long-term negative that has now triggered is the percentage of companies in the S&P that have bested their earnings estimates.  A moving average system using that data triggered a sell signal, which has historically led to poor returns until it reverses to a buy signal.



Risk Level:  4 (Moderate - Low)


The Smart Money is 42% confident in a rally.

The Dumb Money is 54% confident in a rally.


Smart/Dumb Confidence

 (click chart for larger version)


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Short-term Outlook (1-5 Days)



Risk Level:  4



Summary:  It seems traders are content to keep flirting with technical support.  They did so again on Tuesday and we still don't really have a definitive picture on whether it's going to hold or not.


One positive that a few are referencing is that while the S&P dropped to a multi-week low, the advance/decline line on the NYSE did not.  Historically, it has been a little bit of a positive.


During a bull market, when the S&P closes at at least a three-week low, but the advance/decline line does not (a positive divergence), then one week later the S&P was positive 70% of the time with an average return of +1.2%.


When the a/d line also made a new low (no divergence), then a week later the S&P was positive 63% of the time with an average of +0.8%.


Earnings season unofficially ends with Wal-Mart's report.  This season the market didn't do much of anything, ending pretty much where it began.


When Q1 earnings reporting season ends with a whimper, not gaining or losing any more than +/- 2%, then the following off-season (about 39 trading days) tends to do the same.


The median return during the following off-season was -0.2%, with 8 of the 17 occurrences showing a positive return. The maximum loss during the off-season averaged -3.5% compared to a maximum gain that averaged +3.3%. There were five losses larger than -5% at their worst points, and three gains larger than +5% at their best. So a tad weak, but nothing egregious.


We touched on a couple of very short-term, modest positive developments yesterday.  The S&P closed under 1330, but it certainly wasn't a bold drop, so I'm still willing to give the uptrend the benefit of the doubt here.  But again, given the intermediate-term negatives we've discussed over the past few weeks, if this general support level can't hold we'll be looking for a move back to 1250 - 1300 on the S&P.


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Intermediate-term Outlook (1-3 Months)



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Charts & Studies


Chart:  S&P 500 Positive Earnings Surprises


A subscriber passed along a note from the Hussman Funds that discussed various measures related to earnings.


One of the studies looked at a Bloomberg calculation for the percentage of firms in the S&P 500 whose earnings report beat an average of analysts' estimates.  The article suggested that buying the S&P when the 12-month average crossed over the 24-month average, and selling when the opposite occurred, was a good timing signal.


And for the most part, it was.  But it could be a bit better.



Using the Hussman system, since 1993 you would have generated +1298 points in the S&P during the buy signals and you would have avoided -411 points in losses during the sell signals.


If we tweak the parameters a bit, though, it gets better.  By using 6-month and 36-month average, you would have generated +1521 points during the buys and avoided -634 points during the sells.


Here are the buy signals using that system:



Pretty impressive.  The "Max Loss" column shows the worst loss you would have endured during the signal (using monthly closing prices only), and five of them didn't have any loss at all.


It took an average of 9 months for the signals to reverse, though there was a wide disparity among them.  All of them showed a gain of at least +12% sometime during the signal, and on average the S&P was a whopping +21.3% higher by the time a sell signal hit.


And here are the sells:



This isn't nearly as pretty.  On average, the S&P dropped more than -3% at its worst point during the sells, with a couple of them extremely large.  The maximum gains were very modest, with all but one under +10%.  By the time they reversed to a buy signal, only one showed an ending gain more than +5%.


What's the point of showing this now?


Both systems just gave sell signals.


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General Equity Market Indicators


In mid-March, for the first time since September 2010, we had more bullish (for the market) than bearish indicators.  The market quickly took off to the upside, reversing the position of our indicators, so as of the end of April we once again had 0% bullish indicators.  That's not normally a good sign, but the percentage of bearish (for the market) indicators has not yet hit the extreme level of 30% or more.


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


Indicators At Extremes




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Sector Sentiment


The most recent pullback in April hit Semis and Housing relatively hard, while the "safer" Consumer Staples held up well.  The rebound since then, pushing many sectors to new highs, has led to extreme overbought conditions in Staples along with Utilities, while some of the higher-beta areas of the market are not yet in extreme territory.



See sector breadth charts



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Currency / Commodity Sentiment


As has been the case for weeks on end, the US Dollar and Natural Gas carry the most negative sentiment.  It hasn't taken too much of a correction for traders to turn on some former highflighers, though, and overall commodity sentiment is more mixed than it has been in some time.  Currencies, on the other hand, have pushed to new highs in optimism against the Dollar, particularly in the Franc and Australian Dollar.



See all currency/commodity indicators



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