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Short-term
Outlook:
Short-term Strategy
What: We are 25% Bullish and will move to
neutral if the S&P 500 cash index closes under 1100.
Why: The day before a FOMC meeting has a mixed
track record, though the day of the meeting (Wednesday) has
been positive 2/3rds of the time, including 10 of the past
12. That's not much of a seasonal factor, but December
option expiration has been, as we touched on yesterday (this
week has been positive 24 out of 27 years). We also
have the S&P closing at a new one-month (and one-year) high
yesterday, and given the tight range of the past month, this
has resulted in gains over the next week just under 80%
of the time. We do have some short-term sentiment
extremes, most notably the ultra short-term STEM.MR Model,
but as noted below it may have reached enough of an extreme
as to be less reliable.
Sentiment:
Trend:
Most of our indicators are neutral, but the
STEM.MR Model is overbought. Trading at a new
one-year high. Support/Resistance:
Other Tendencies:
Breakout over 1110 leaves no
real resistance above except the intraday high of 1119. Tendency to follow through
from a breakout; 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. The S&P has broken to a new
closing high, which usually results in further short-term
gains, but these 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:
New closing high leaves little resistance above. The next minor
resistance is around 1120; multiple layers of support lie below. Pullbacks after highs
have been positive, but we've seen some "toppy"
kind of behavior and speculative activity.
Equity Indicators - Updates and Extremes
Monday's buying
pressure and (barely) breakout in the S&P 500 on a closing basis was
enough to push our shortest-term models well into overbought territory.
We don't normally discuss measures that are this short-term, but the
reading was extreme enough to mention. When a sentiment indicator
hits an extreme, that's one thing. But when it hits an historic
extreme, that's oftentimes something different (we discussed this quite
a bit in March and April).
There have been 19 times in the 7-year history of this model that it hit
the current extreme. The next day was mixed - positive about 50%
of the time and with a slight negative return. But by three days
later, the S&P 500 was positive 74% of the time.
There were two times it occurred when the S&P closed at a new one-year
high (12/18/03 and 03/14/06). Both resulted in further gains over
the next days and weeks (though the 2006 instance was very choppy).
We've hit this kind of extreme four times during past Decembers
(12/18/03, 12/27/06, 12/24/07 and 12/31/08). Three of the four led
to some short-term upside follow-through, but after that it was
inconsistent, especially as we passed the first couple of days of
January.
Overall, we're typically leery of the upside when we get a short-term
overbought reading in this model, but it has reached such an extreme
that forward returns become less predictable.
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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
Nothing notable for today.
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For December
15, 2009
25% Bullish As of Dec
14,
1114
SPX
to
