Morning Market Comment - October 8, 2009

Good morning...We begin the day with some eager buying interest in the pre-market futures. They climbed higher right after the bell yesterday, popped again after a surprisingly strong Australian jobs report, and have held pretty steady since then.

Last month, we took a look at Over The Counter volume. This is trading in issues listed on the "pink sheets", lottery-ticket style stocks that can't meet exchange minimums for listed trading.

As of the end of August, we weren't seeing much in the way of speculative activity. All the measures we track had ticked up a bit from prior months - certainly to be expected given the huge rally - but they were surprisingly tame.

The figures for September were just released and they showed another uptick in volume. We're still not seeing what could be considered a huge warning sign in terms of all-out crazy-monkey trading activity, but we are seeing the highest turnover in these stocks since the market peaked.

The jump in total share volume is the most concerning here. Other than a few months in early 2006, last month's volume at over 45 billion shares was on a par with the highest of readings we've ever seen.

The table below shows the performance of the Nasdaq Composite after other months when share volume exceeded this threshold.

Nasdaq Composite Performance After OTC Volume > 45b shares
Date	1 Month Later	3 Months Later	6 Months Later
03/31/06	-0.7%	-7.2%	-3.5%
02/28/06	2.6%	-4.5%	-4.3%
05/31/06	-0.3%	0.2%	11.6%
04/28/06	-6.2%	-10.0%	1.9%
01/31/04	-1.8%	-7.1%	-8.7%
01/31/05	-0.5%	-6.8%	5.9%
06/30/04	-7.8%	-7.4%	6.2%
05/31/07	-0.1%	-0.3%	2.2%
02/29/04	-1.8%	-2.1%	-9.4%
04/30/04	3.5%	-1.7%	2.9%
03/31/05	-3.9%	2.9%	7.6%
05/29/09	3.4%	13.2%

Average	-1.1%	-2.6%	+1.1%
% Positive	25%	25%	64%

Overall, the returns over the next one to three months were weak, though the latest figure from this May was anything but. The overall market paused a bit in June, but it wasn't anything especially notable.

As a percentage of total Nasdaq volume, this figure is just under 100% (meaning pink sheet volume nearly matched the volume on the listed Nasdaq exchange). This isn't anywhere near a record - the highest was 290% in March 2006, but it is the highest since May 2007. Overall, expressing the volume as a percentage of total Nasdaq volume wouldn't materially change the months in the table above.

This is a minor warning sign, and probably not enough to get too worked up about just yet. If October sees yet another surge in pink sheet turnover, then we may have something, but it's not extreme enough just yet.

We're also getting a few more indicators coming in showing a surge in speculative fervor (the latest Consensus survey of futures traders was 72% bullish, the highest level since October 2007), but as a whole, we don't have a large confluence of measures showing excessive optimism on an intermediate-term time frame.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend:	Positive given a rising 200-day average, but uptrend line from March low is being threatened
Support / Resistance:	Resistance at recent highs at 1075 and then 1120; support at 995 and 950
Other Tendencies:	Pullbacks after highs have been positive

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration. Some of those studies were even more positive, and suggested a new bull market.

During mid-April, the market held up extremely well in spite of being overbought. This is very rare during an ongoing bear market, and added to the idea that "this time is different" in terms of bear market rallies, as we reiterated in early May.

On July 10th, we looked at a number of short-term oversold readings, and like a good market does, it responded by rallying strongly. The rally since then has been remarkably persistent, rolling over a multitude of indicators and studies that argued for a pullback. As we discuss ad nauseam, a market that does not respond to short-term extremes usually has more work to do in the direction of the extreme.

We've seen some periodic bouts of excessive optimism during that time, and the market has pulled back in the very short-term after them. But each time, the major indexes have held technical support, and rallied from even intraday oversold readings, so we've seen little change in the uptrend's character just yet.

We've been watching how the markets recover from the Key Reversal Day last Wednesday. As noted in a comment at the time, short-term follow-through is key. The S&P performance since then has been choppy to modestly negative, but we continue to see little evidence yet of unbounded speculation or a change in the market's character, either of which would cause us to become more suspicious of the S&P's one- to three-month upside potential.

Signal Strength Breakdown	Notes
Sentiment:	Neutral short-term guides
Trend:	Lower highs and lower lows, that may change with today's trading
Support / Resistance:	We're still under recent highs (1063 and 1075), but so far the market hasn't had much trouble with "resistance"
Other Tendencies:	The market tends to pull back after consecutively strong sessions

On Friday we discussed the idea that the gap down based off the Payroll Report was probably more of a positive than anything. Our short-term guides were already showing excessive pessimism, the intermediate-term trend of the market was still positive and large reactions to major economic reports tend to reverse themselves in the day(s) ahead.

The market once again recovered very well from short-term oversold conditions, which mitigates somewhat the negative pattern of lower highs and lower lows that we've seen. That still leaves the short-term trend as negative, but we haven't seen the kind of sustained and eager selling pressure that normally accompanies a longer-term change in trend.

That string of lower highs and lower lows may be broken today as the market is surging once again. We don't have many "excessive optimism" readings among our most sensitive indicators, which decreases the probability of a "gap and crap" at the open. The short-term measures we looked at yesterday (S&P breadth and the low put/call ratio) are still in effect, but a breakout and hold today will violate most of the maximum gains we'd seen before - meaning we're seeing a change from prior bearish signals.

With the big gap up this morning - after three positive days and just under the previous swing high - the bears' best bet is a fade right from the get-go this morning. If we see a higher intraday high after the first hour of trading, then the probability of a meaningful reversal diminishes significantly.