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Short-term
Outlook:
Short-term Strategy
What: We will go 25% Bearish if the S&P 500
trades below 1114.
Why: The song remains the same as it has for
the past week - we currently have what has traditionally
been a very bearish setup among our indicators, at least in
the short-term (we look at another example below). But
trying to sell short into one of the most illiquid markets
in years, that trades at a new yearly high every day, is not
my cup of tea. So I'm waiting for January to arrive,
or (for now) a break back below the previous breakout level
of 1114. Seasonality this time of year is less
positive than assumed, at least since 1986, but again in
such a low-volume market I simply don't trust the short side
to follow through on its historical patterns just yet.
By the way, this is only the fourth time in its history that
the S&P 500 is on track to gap up at least +0.25% after six
straight up days while trading at a new high. The
others were 12/17/85, 01/16/87 and 06/25/98. All
closed below the open those days, but none marked highs of
any import.
Sentiment:
Trend:
Big spread in the Indicators At Extremes. All short-term
trends are positive. Sup / Res:
Other:
Breaking to new highs, not
much resistance above. Nothing notable.
Intermediate-term Outlook:
Intermediate-term Strategy
What: We will remain neutral.
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.
The rally exceeded all kinds of expectations, and on an
intermediate-term time frame we haven't seen too many
reasons to expect an imminent end. There have been
some signs of a
surge in
speculative activity, but that has only led to
short-term dips. Until we see more signs of outright
and excessive speculation across the broad spectrum of
measures we follow, and/or a technical breakdown in the
market, we can't spot many reasons to fight the uptrend just
yet. That may change during the seasonally weak middle
of January, but for now higher prices get the benefit of the
doubt.
Sentiment:
Trend:
Smart/Dumb Confidence is bearish.
Rrising 200-day avg;
higher highs/higher lows. Sup / Res:
Other:
Trading at new highs. Nothing notable.
Equity Indicators - Updates and Extremes
One of the more
fascinating aspects of watching sentiment over the past few months is
the behavior of traders in the Rydex family of mutual funds.
In the index funds (primarily the S&P 500 and Nasdaq 100), what we've seen time and again is a swing of money into the
bearish
funds when the S&P breaks out to a new high (or attempts to). Then they scramble
to cover those shorts as the index continues to rally, finally
succumbing to the pressure to be very net long...right before stocks
take another breather.
Every time we've seen the Bull / Bear Ratio jump above 2.5, it has
marked either a short-term peak or a time when the S&P 500 was about to
suffer an imminent drop of 1% or more - just enough to scare these folks
back out of the long funds.
It jumped above that level again on Monday.
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Equity Market Indicators
Notes: For several weeks, we've been watching for a day where 0% of our indicators were bullish (for the market) while 30% or more were bearish. We have that again as of December 22nd.
The reason we've been watching for this is that every time it has occurred since the March bottom, stocks entered a short-term corrective phase. While seasonality and extremely low volume may impact this instance, it's certainly a cause for (short-term) concern.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
"Dollar's Resurgence Looks Poised To Continue", a headline in the Wall Street Journal yesterday, summed up the attitudes of speculators in Dollar futures.
Once again, we saw a push into long positions among these trend-following traders, clamoring aboard what for now is a minor rally in the buck. The chart below shows the past decade in the US Dollar Index, along with the net positions of large and small speculators.
The black dotted horizontal lines coincide with their current position, and it's pretty clear that while small specs have (barely) been more net long than they are now, large specs have on only one occasion. That mid-September 2008 jump in long positions didn't mark a major peak in the Dollar, but it did immediately precede about a 4% decline over the next few weeks.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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For
December 29, 2009
Neutral As of Dec 17,
1098
SPX
