Short-term Not Looking All That Great

12/31/08 9:20 AM EST

Good Wednesday morning...we begin the final session of the year with a mixed reaction in the pre-market futures.  Most other markets are showing similarly listless trading, and interest will almost certainly drop off once we get past the noon hour.

Over the past couple of days, we've touched on put/call ratios, which have started to reach bearish (for the market) territory.  The Total Put/Call Ratio, Equity-only Ratio, Equity-only Ratio De-Trended and ISE Call/Put Ratio have all moved above their upper trading bands.

Unlike many technical, fundamental and sentiment indicators, put/call ratios have fared quite well during 2008, no small feat when considering we've endured one of the most complicated years in history.  The fact that they are in a position now that has preceded market weakness consistently is not a positive sign.

We're seeing a few other indicators climb out of the depths they reached in October and November as well.  The Investor's Intelligence ratio of bullish vs. bearish newsletter writers has moved back to 50%, meaning that exactly half expect the market to rise and half expect it to fall.

Traditionally, this is a very bullish group of folks, and when we've dipped below 50% in the past, it was a good buy signal.  This year has been different, as the ratio has spent the majority of the year under 50%, and dipped to a 20-year low under 30% in October.  The current reading is the first time since August there have been as many bulls as bears.  That isn't a bad sign per se - we need to see traders become more bullish if we expect the market to rise - but we can no longer really count on excessive pessimism in that survey as a reason to be bullish going forward.

That's true with most of our other indicators as well.  The Smart Money and Dumb Money Confidence indexes have shown a pretty large move over the past week, with the Smart Money now down to 50% and the Dumb Money up to 58%.  Neither one is in extreme territory yet, but that's the most optimistic reading from the Dumb Money in more than six months.

Given a number of positive indications we've discussed over the past few weeks (here and here and here), I'm still looking for generally higher prices.  I'm becoming less enthused with the idea as we struggle to hold gains and we continue to see an erosion in our indicators, so a move back under 850 on the S&P would have me back-pedaling on the "longer-term rally" idea, and a break of 820 will see me all but abandon it.  What we need to see is a sustained move over 920 to confirm the higher high / higher low pattern that is still valid.

On a short-term basis, our Signposts are again tilted somewhat negative, but the edges are not especially heavy.  The weighted average of the probability of a rising market is 47%, which is below random but not especially strong.  I prefer to see something under 45% or so to look for short sales.  The STEM.MR Model is close to overbought territory, but not quite there yet - when it hits overbought and reverses, then we usually have even less of a chance for sustained gains (particularly given that the longer-term STEM Model is already well into overbought territory).

Bottom line, the market looks OK with the longer-term positive's we've discussed and the continued ability of the S&P 500 to hold above 850.  In a more immediate sense, I'm less optimistic that we're going to be able to sustain further gains given the Signpost studies and the imminent overbought condition of the shorter-term indicators.

All the best,