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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 latest Investor's Intelligence survey
(click
here for more info on I.I.) shows the
percentage of bears at a new 20-year extreme. The
last time there were this few negative newsletter writers
was in March 1987. That simply adds to the other
developments we've discussed over the past week or so, all
of which point to an increasingly likely correction.
My thought so far has been to avoid betting against the
low-volume, illiquid price action and wait for either a
breakdown to occur or January to arrive. We're
starting to see some cracks, but I'm still going to wait
(for now) for a breakdown back below 1114 to likely augur in
a larger pullback.
Sentiment:
Trend:
Big spread in the Indicators At Extremes. All short-term
trends are positive. Sup / Res:
Other:
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
Rydex Leveraged Bull / Bear Ratio Yesterday we
looked at the Bull / Bear Ratio in the index funds at Rydex. Today
we're looking at the leveraged index funds, that move at least 2% for
every 1% move in the S&P 500 and Nasdaq 100.
The chart below is a little different than what we normally show, but it
really highlights the pattern we've seen over the past few months.
The top (blue) line is the Rydex Leveraged Bull / Bear Ratio. The
lower (red) line is the 1-day percent change in the S&P 500. The
vertical gray bars highlight days that the Bull / Bear Ratio rose above
2.5 (i.e. more than 2.5 times as many assets in the bullish index funds
as the bearish index funds).
By looking at what happened to the percentage change in the S&P 500 in the day(s) after the gray bars, we can clearly see that out of 7 occurrences, on 6 days the S&P suffered a drop of -1% or more within 2 days, usually the next day. The one exception led to a loss of -0.5%.
At some point this pattern will change, but until it breaks down consistently, I'm considering the fact that the ratio is above that 2.5 threshold now to be a negative short-term sign.
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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
Futures Trader Positions and Public Opinion in Orange Juice As much as any other commodity in the world, Orange Juice is subject to the ravages (or kindness) of weather patterns. As growing conditions change, OJ follows.
Weather in Florida, the 2nd-largest citrus producer, has not been kind this year. December is a seasonally weak month for OJ, but the price of that futures contract has risen steadily over the past month, building on what has already been a months-long rally.
That is not lost on trend-following futures traders. They have now moved to their 2nd-largest net long position in history. We're also seeing extreme optimism among other traders, as Public Opinion has jumped to 75%, the highest in more than two years and one of the highest levels in a decade.
Sentiment (and any other factors) will take a backseat to the weather patterns in the coming weeks, with another cold snap likely serving to push OJ futures even higher. If the weather moderates, however, and Floridians are able to harvest more than currently expected, then there are enough traders stuffed with long positions that they should get squeezed on a swift and severe downside move.
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 30, 2009
Neutral As of Dec 17,
1098
SPX
