Short-term Risk Level:  6

The market has done pretty well when it rallies into a Nonfarm Payroll report day, but then has suffered in the days following.  Given some other metrics, a rally on Friday, if we even get one, should lead to a short-term pullback early next week.

Sentiment

Options traders don't seem to be buying into the rally.  Despite at least +1% gains in the S&P 500 each of the past 3 days, there have been more puts than calls traded on the Chicago Board Options Exchange.

This has only happened twice before, on 8/8/07 and 9/15/11.  Curiously, both times the S&P lost at least -6% during the next week.

There have been 6 times that the Equity-Only Put/Call Ratio never dropped below 0.65 on any of those days.  It seems like that would be a good sign of too much skepticism towards the rally, but

three days after all 6 occurrences, the S&P was lower by an average of -2.2%.

The dates were 4/16/97, 7/30/02, 8/8/02, 8/8/07, 1/2/09 and 6/1/09.  Following three days, the results were inconsistent.

Price Action

A Data Brief from earlier this afternoon looked at other times the S&P has managed to rally by 1% or more 3 straight days after hitting a 52-week low.

Each time, stocks came back down, usually during the next few sessions but at least sometime during the next few weeks.

There have been 13 times other than Thursday when the S&P 500 SPDR (SPY) rose at least +0.5% for 3 straight days while under its 200-day average, and the last day's volume was the lowest in at least 2 weeks.

Three sessions later, SPY was positive 31% of the time, averaging a return of -0.6%.  It suffered a lower close sometime within a week every time but once.

Seasonality

There have been 11 times the S&P rallied +0.25% or more 3 straight days into a Nonfarm Payroll report (released on Fridays).

It rose again on that Friday 8 of the 11 times, for an average of +0.3%.  From Friday's close through both Monday and Tuesday, it settled back, rising further 45% of the time.  8 of the 11 times, the S&P closed lower than Friday's close within the next week.

There were only 3 times the S&P managed a +0.5% gain 3 days in a row into the Payroll report (7/2/99, 2/2/07 and 4/3/09).  Each time the S&P rose again on Friday, which formed a short-term peak each time as well.

Miscellaneous

The Down Pressure reading for the S&P 500 and Nasdaq 100 have now approached 10-year records.

Around 93% of volume and points have gone into rising stocks during the past 3 days.  The only two days in the past decade approaching this were 1/2/09 and 9/3/10.

Intermediate-term Risk Level:  5

Stocks have formed a potentially important low.  Due to a lack of true historical sentiment extremes and inconsistent price action, however, we'll have to wait for several weeks to see if the low will be violated.

Sentiment

In the last update from September 16th, we highlighted the fact that our sentiment (and other) guides had pointed to the likelihood of at least a one-month low on August 9th, but due to the change in trend, we couldn't count on much more than that.

Those extremes from early August did give us a month-long low, so we got the expected follow-through there.  And as bear markets do, the rally petered out not long after and took us to new lows in early October.

We've seen some improvement in our sentiment guides, meaning more pessimistic extremes.  We don't have near the type of confluence of extremes that we did in August, but still there are some compelling data points.  Perhaps the most notable is the rush into cash by Rydex mutual fund traders.

Price Action

It's entirely possible, perhaps even probable, that what we've witnessed over the past few days is a typical re-test of the August panic lows, and we're about to embark on a multi-month rally.  We've nearly satisfied the median drawdown during recessions, and over the past couple of days stocks have staged a furious rebound.

Unfortunately, those rebounds have been inconsistent predictors of major bottoms, so we're going to have to wait to see how the market reacts and if it can continue to follow through in the weeks ahead.  That means missing "the low", but also greatly reducing risk if this is just yet another bear market bounce.

Seasonality

The 4th quarter of most years is very positive (up 73% of the time since 1928 and 80% of the time over the past 30 years).

If the 3rd quarter was down -10% or more, then the 4th quarter was positive 7 of 12 times.  Excluding 2008, 7 of the last 8 occurrences were positive, dating back to 1940.

Miscellaneous