Short-term Up For Grabs

12/10/08 9:15 AM EST

Good Wednesday morning...we begin the day with some buying interest in the pre-market futures as folks are apparently enthusiastic about news of (yet another) bailout of the auto makers.  Why anyone would be excited about that is beyond me, but we've seen weirder things in this market.  Like yesterday's willingness of investors to pay the government to allow it to use their money.

The pre-market move in stocks is being matched by a reversal in recent trends in other markets as well.  I continue to pay close attention to inter-market correlations, as all markets at the moment are intertwined.

Based on Public Opinion and other guides we track, sentiment towards currencies like the Yen and Dollar and fixed income like long-term bonds, is getting overly optimistic, while opinion towards commodities like Crude have rarely been lower.  Some reversal of that sentiment seems like it should be imminent.

As for stocks, the "Turnaround Tuesday" stats we went over yesterday played out as the indices dipped, but any negativity from that stops at Tuesday's close.  If anything, there is a slight positive bias going forward (i.e. when Friday and Monday were up more than 1%, and Tuesday closed lower, then the S&P 500 showed a positive return through Thursday's close 71% of the time, averaging +0.6%).  Fairly positive, but not much to bank on there.

Among our indicators, there are a couple of new extremes, such as the one-day OEX Put/Call Ratio and the Rydex Beta Chase Index.  When the market has rallied over the past few days and the OEX ratio reaches this kind of extreme, the market has shown a modest tendency to back off over the next few days (about 55% of the time).  Same for the Rydex indicator, but it hasn't quite reached the extreme level I prefer to watch for, showing that traders are at least five times more likely to trade a "risky" mutual fund than a "safe" one.

The group of short-term indicators we looked at on December 4th are close to going "all in" on the overbought side, something that has preceded short-term weakness in the market with regularity.  Perhaps we'll see that with more of a rally today, but we're not there yet.

Bottom line, quite frankly I have no idea on the short-term.  I think we could just as easily see an extension of the rally above Monday's highs, or a complete crap-out from this gap up open and a move back down to 850-875.  I'd give a slight edge to the latter, but not enough to trade it.

Intermediate-term, I'm encouraged by the positives that have been gathering over the past couple of weeks, in particular the powerful buying interest exhibited by the breadth indicators we went over on Monday and Tuesday.  I don't think we'll see a move below 850ish, and believe that short-term oversold readings above 850ish should lead to good long-side opportunities.

The worst scenario for me would be a rally that doesn't give a good entry, similar to April/May 2003 (I find it exceptionally difficult to be a momentum chaser during a bear market).  I was fooled by a somewhat similar long-side setup in October that led to the November failure, and maybe this is a case of "fool me once...", but I'm still willing to give it a potential multi-month rally the benefit of the doubt.