Short-term Risk Level: 6
Bottom Line
The historic level of volatility continues, with
the S&P futures dropping nearly -2% early Thursday, then rising nearly +4%.
We're obviously still beholden to headlines out of the Euro zone, plus we have
the Nonfarm Payroll report. It's questionable how much we can rely on this
right now, but history suggests a pullback early next week.
Sentiment
We've been watching sentiment among Rydex mutual
fund traders lately. Unlike one month ago when they were showing
extreme uncertainty, now they're...not.
The
chart to the right is an aggregate of the bull/bear ratio for the S&P 500,
Nasdaq 100, DJIA and Russell 2000 index funds (click
for larger view). In early October, it dropped below 1.0 (i.e. there
was more money invested in the inverse funds than the long funds). Now
we're seeing 3 times more money in the long funds than the inverse funds.
That ain't good. These Rydex flows remain the most troubling out of
everything we follow.
Another sign of increasing comfort is the VIX.
After
jumping more than 15% two days in a row, it has now declined -5% two days in
a row. That hasn't led to anything consistent, but when the VIX was still
above 30% at the time, then over the next 3 and 5 days the S&P 500 was positive
only 36% of the time (8 out of 22 days) since 1990.
Corporate insiders continue to pick up their pace
of selling versus buying, according to
InsiderScore.com. This week's
Buy/Sell Ratio was the 3rd-worst of 2011, behind February and May.
Both of those happened to coincide with market peaks.
Two caveats are that volume is very low due to
corporate quiet periods during earnings season, and that historically the
current ratio of -1.1 is just barely outside of the normal range. I
would consider this only a very minor negative at this point.
Technicals, Seasonality, Etc.
The S&P 500 SPDR (SPY) has rallied 1% or more for
two consecutive days heading into a Nonfarm Payroll report 9 times. Of
those 9, the S&P closed up 6 times the day the report was released.
But the next day (Monday), the S&P was positive
only 2 times and through Tuesday's close it was positive only once. That
one exception happened to be the last occurrence, from last month, when we were
emerging from very oversold conditions.
If we ignore the Payroll report and just look at
any time the S&P rallied 1% on Wednesday and Thursday, then from Thursday's
close through the next Tuesday's close (3 trading days), SPY sported a
positive return only 30% of the time (8 out of 27 occurrences). The
risk-to-reward was 2-to-1 (-2.2% versus +0.9%).
