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Today's Need-To-Know * With the futures looking to
gap up near Wednesday's high, a higher intraday high after the first
hour of trading will significantly decrease the probability of another
downside reversal. * Newsletter writers are
showing the 3rd-lowest amount of bearishness in 20 years. * Individual investors aren't
quite as complacent (but aren't exactly worried, either). * Retail money market levels
have decreased to 8% of the S&P's market cap. A similar situation
in the 1980's led to a choppy move lower over the next year.
Short-term
Outlook:
Neutral since Oct 5th (1029
SPX)
Short-term Strategy
What: Same as yesterday - we will go 25% Bearish if
the S&P 500 e-mini futures trade at 1102 (just below
Tuesday's low). If triggered, then we will go back to
Neutral if they subsequently trade at 1111.
Why: If the S&P gaps open near yesterday's high
(about 1115 in the futures), then the bears' best hope would
be for an immediate failure. A higher intraday high
after the first hour of trading, especially since that would
almost certainly mean a new yearly high as well,
significantly decreases the chance for another downside
reversal. Because we really
don't trust the short side much right now, we're going to wait for some downside
confirmation before becoming too negative, moving to a minor bearish
position if we take out Tuesday's low. With another
new high yesterday, why keep
focusing on the downside? Same reasons as the past few
days -
troubling
net
short positions from "smart money" traders in the NDX,
a surge in
speculative options activity, a
jump in call buying on the
ISE exchange and the
3rd-lowest percentage of bears in the I.I. survey in 20 years.
Sentiment:
Trend:
Several of our shortest-term guides are in "red line"
territory which typically leads to a breather over the coming day(s). The S&P broke to
a new high on Wednesday, but then fell right back into its
recent range. Support/Resistance:
Other Tendencies:
Resistance is still tough
near 1110. Nothing notable.
Intermediate-term Outlook: Neutral
since Apr 9th (843 SPX)
Intermediate-term Strategy
What: We will remain neutral for now.
Why:
In March,
we discussed a large number of reasons to expect an imminent rally
of one to three months' duration, or perhaps even more.
We've had ample opportunity to discuss the historic
momentum since that low, and have seen little reason
since to expect anything other than short-term
corrections. In
late October, we looked at
some "toppy" kinds of studies, and after those warning signs the S&P broke
its uptrend line from March.
However, during that late-October correction, traders quickly
became bearish and the market convincingly bounced
back - that's healthy behavior. The recent
failure to hold the 1100 breakout area is something to
watch carefully given the "topping" warning signs and a
surge in
speculative activity, especially as we look to challenge
that 1110 area yet again.
Sentiment:
Trend:
Smart/Dumb Confidence Spread is neutral.
The S&P has a rising 200-day average and a series of
higher highs/higher lows. Support/Resistance:
Other Tendencies:
Resistance is nearby at 1100. Pullbacks after highs
have been positive, but we've seen some "toppy"
kind of behavior.
Equity Indicators - Updates and Extremes
Investor's Intelligence Bearish % As we discussed
in a
Research Report yesterday, the percentage of bears in the I.I.
survey has dove lower yet again. Over the past decade, there have
been 8 other weeks with readings about this low, and 7 of those times
the S&P was lower a month later. It's tough for stocks to maintain
upward momentum with such lopsided sentiment.
In comparison to
newsletter writers, individual investors aren't quite as optimistic.
The percentage of bears in the AAII survey decreased this week, to 34%
of the total. That's low when compared to other readings over the
past year, but it is about average historically and not enough to push
the indicator outside of its trading bands.
The monthly
survey of where individual investors are stashing their money was also
released on Thursday morning, and it showed a small 2% drop in stock
allocation, to 55% of total assets. Bonds dropped off
significantly, from 24% to 18%, while cash was the recipient, jumping
8%. Overall, if we're to believe what the survey says, then
individuals are still under-exposed to equity markets.
This conflicts a
little bit with the chart above, but weekly money market data from
retail (i.e. mom-and-pop) investors showed yet another decrease.
The AAII chart above suggests that cash levels are rising, but that data
is from November, and is only an estimate of what people *said* they
did. The chart below is weekly data, with little delay, and shows
actual cash balances.
Expressed as a percentage of the S&P 500's market capitalization, money
market levels have dropped from more than 14% this spring to just over
8% lately.
We can see from that chart that the only historical comparison is from the early 1980's, when money market levels also soared to more than 14% of the S&P 500's value near the market bottom. The chart below shows what happened going forward when money market levels dropped to just above 8% as the market recovered.
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Equity Market Indicators
Notes: Corporate insiders and the various sentiment surveys continue to be the more worrisome indicators among the broad groups that we follow. Most of the others are either neutral or slightly bearish (for the market). Among individual indicators, we continue to watch most closely for scenarios where 0% are bullish and 30% or more are bearish, which has been a very consistent predictor of short-term weakness ahead since March.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
No notable updates.
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For December
3, 2009
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