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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 is under 1100 and makes a lower
intraday low after the first hour of trading.
If it reaches 1120, we will keep a 5-point trailing stop.
Why: The market reaction to yesterday's FOMC
statement was modestly negative, with the major indexes
closing below their opening prices and in a few cases below
the previous close. Such behavior following a
scheduled FOMC announcement usually had bullish implications
for the following day (up 7 out of 9 times), but this
morning's indicated gap down of more than -0.5% does not (up
only 3 out of 8 times). That makes for a frustratingly
conflicting bias. Our short-term guides are almost
exactly neutral according to the models and indicator
scores, though judging by the Indicators At Extremes, we
have 0% that are bullish for the market and 25% that are
bearish. When that's neared a 30% spread, the market
has entered a short-term correction every time since the
March bottom. This initial lack of follow-through on a
bullish setup (breakout to a new one-month high in the S&P,
positive seasonality during option expiration week, and
tendency to rebound from a weak FOMC reaction) is not
encouraging, so we will remove any bullish bias if the S&P
records a lower intraday low after the first hour of
trading, and is below 1100 at the time.
Sentiment:
Trend:
Most of our indicators are neutral. Back into the
trading range: 1085-1110 Support/Resistance:
Other Tendencies:
Now we have Monday's high at
1115 to get over. Tendency to follow through
from a breakout; strongly positive seasonality during December option
expiration week; positive following weak FOMC days.
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
We know from the
Investor's Intelligence sentiment survey that newsletter writers are
wildly bullish (or more accurately,
not bearish). Individual investors, on the other hand,
have shown a mostly lukewarm
attitude on the market.
This week, that changed as the percentage of bears in the AAII survey
moved to the 3rd-lowest extreme in 18 months. The red arrows on
the chart below highlight the two lower extremes. Obviously, that
wasn't good for the market going forward.
That's not quite the whole story. The chart below shows the entire
history of the AAII survey, and in that context, this recent reading is
almost exactly average when viewed over the past ~20 years.
I'm leery of this drop in bearish opinion, particularly since it
occurred while the major equity indexes were mired in a trading range,
and the previous two similar extremes led to large market declines.
But it would be a shorter-term concern only, especially given the fact
that we're not seeing such an extreme compared to historical levels. Over the past
five years, whenever we saw corporate insiders swing to one extreme or
the other, their time in that position was usually limited to a few
weeks before they began a move to the other extreme.
Since late July (and a further 10% rally in the S&P), however, insiders
buy/sell ratios have been stubbornly skewed towards a selling extreme,
other than a few weeks at the end of October. The latest weekly
data from InsiderScore.com shows yet another drop in buying vs. selling
pressure and a continued extreme in the ratio.
We're seeing a somewhat similar situation from the Insiderinsights.com service, which recently had its buy/sell ratio dip to the most severe skew towards selling since the summer of 2007, and one of the most extreme levels in the past 12 years. For the most part, stocks had a difficult time maintaining upside when it has reached this kind of extreme, giving back any gains it did happen to make in the shorter-term.
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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.
Prepared by Jason Goepfert Founder, Sundial Capital Research, Inc.
Forwarding or other distribution of this email is prohibited without the express permission of Sundial Capital Research, Inc. If you do not possess a firm-wide license, then forwarding this message will violate your subscription agreement.
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For December
17, 2009
25% Bullish As of Dec
14,
1114
SPX
Bearish For The Market