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For the online version of this email, please click here
Short-term
Outlook:
Short-term Strategy
What: We will move to 25%
Bullish if the S&P 500 cash index is above 1111 but below
1120 at Monday's close.
Why: The big focus this week will be the FOMC
meeting. Historically, the market has been mixed in
the days preceding December FOMC decisions, up about half
the time and with a barely positive average return.
Lately, though, the day before the announcement has been
positive 10 of the last 12 times (looking at all months).
Speaking of December, this is options expiration week, which
has been positive 24 out of 27 years in December
since the inception of S&P 500 futures. The three
losses were all smaller than -1%, the average return was
+1.5%, and the reward-to-risk was 2.5-to-1. This is
the time of year when I begin to let seasonality dictate
more of my decision-making, and it is definitely skewed to
the upside. Given the market's
tendency to continue in the direction of a short-term
breakout from such a narrow range and the positive
seasonality, we're looking for a long-side bias on a move
above 1112. The biggest risks are an overbought
STEM.MR Model, a few signs of excessive speculative (see
below) and the fact that when Down Pressure has reached this
level the past three times, the S&P almost immediately
topped out, so stop losses on any longs are a must-have.
Sentiment:
Trend:
Most of our indicators are neutral, but the
STEM.MR Model is overbought. Still in the
1085 - 1110 range. Support/Resistance:
Other Tendencies:
Resistance
at 1110 is just overhead. Strongly positive seasonality
during December option expiration week.
Intermediate-term Outlook:
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 multiple
failures to hold the 1100-1110 breakout area are another
warning sign. This is especially the case after we've
seen a
surge in
speculative activity, which has continued during the
first week of December. If the S&P breaks out of its
range above 1112, it will likely continue higher into early
January - but those initial breaks often have mean-reverting
tendencies longer-term, and the market very often runs into
trouble during the "meat" of January, so we're not looking
to trade an upside breakout on an intermediate-term time
frame.
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 still tough
near 1110, but there are multiple layers of support under the major
equity indexes. Pullbacks after highs
have been positive, but we've seen some "toppy"
kind of behavior and speculative activity.
Equity Indicators - Updates and Extremes
For the third
week in a row, we're seeing enough speculation in the options markets to
consider it excessive.
The
ROBO Put/Call Ratio that looks at opening purchases of the smallest
of options traders has remained above its upper trading band (1.5
standard deviations from the one-year average) for three straight weeks.
The only other time that this has happened since 2000 was June 27, 2003,
after which the S&P 500 went nowhere for the next two months.
Large traders, those trading 50 contracts and up, spent 37% of their
total volume on buying call options. That's the highest amount
since the spring of 2000.
Taken together, bullish strategies (buying calls and selling puts)
accounted for nearly 1.3 times as much volume as bearish strategies
(selling calls and buying puts). That's the highest that we have
recorded since the spring of 2000.
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Equity Market Indicators
Notes: Corporate insiders, equity index futures positions (primarily in the Nasdaq 100) 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 imminent short-term weakness since March.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
The Dollar was hated for a long time, and for good reason. Trend-followers made a lot of money on the short side, and it took quite a bit before they changed opinions.
That they seem to have done. The latest Commitments of Traders report showed a huge shift in futures positions, with both large and small speculators moving to net long positions. Small speculators have been net short for most of the past 9 years (good for them!) but when they've switched to being net long, the buck has typically stumbled not long thereafter, at least in the short-term of the next few weeks.
If we see another surge in these positions this week, we'll be looking for a pause in the Dollar's nascent reversal.
Hogs aren't a widely-followed market, though prices can impact some firms in the processing business.
Extremes in "smart money" commercial hedger positions often give good heads-up to trend reversals in price, and we've seen a tremendous shift there in the past few weeks as Hogs have rallied. After nearing an all-time net long position right as prices were bottoming, commercials have made an about-face and become net short to the 3rd-largest degree in history.
In most commodities, when hedgers to get long it is often a better buy signal for the underlying commodity than it is a sell signal when they go net short. Still, in the past when hedgers have shorted Hogs this heavily, the commodity has had difficulty going forward.
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For December
14, 2009
Neutral As of Dec 4,
1115
SPX
