Morning Market Comment - October 9, 2009

Good morning...We begin the day with some mild selling pressure in the pre-market futures. With some added rumblings about the Dollar, and its very close (inverse) relationship with stocks, probably a little more attention than usual will be paid to the buck today in lieu of any meaningful economic or earnings reports.

After struggling for hours to look for something new to write, I've come up empty-handed, and I'll admit to being confused by some of the recent data coming in:

* (Bearish) The NAAIM survey of investment managers shows a large surge in long positioning, with last week's reading being the highest since mid-October 2007, but...

* (Bullish) Individual investors are not becoming overly bullish or buying into the rally in the kind of manner that would normally provide a contrary edge.

* (Bearish) Equity options traders have been concentrating heavily on call options over the past three days, but...

* (Bullish) Rydex mutual fund traders have been fleeing to safety, being nearly twice as likely to trade a "safe" fund than a "risky" one.

* (Bearish) More speculative volume has jumped again, as evidenced by the Nasdaq / NYSE Volume Ratio, but...

* (Bullish) Insiders have been backing off their selling pressure (although this is a quiet period due to earnings season).

This does not clear the outlook at all, in fact it muddies it significantly. While we never have 100% agreement across all types of the guides we follow, we usually can piece together a more coherent picture than we're getting right now. Seems like a good time to step back and let it clear a bit.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend:	Positive given a rising 200-day average, uptrend from March is still intact
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, though the STEM.MR Model for the S&P is now slightly overbought
Trend:	Short-term moving averages are pointing higher, but the S&P has a pattern of equal/lower highs and lower lows
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 and big gaps up

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.

Yesterday we got a big gap up, and noted before the open that the bears' best chance would be for an immediate fade. If we saw higher intraday highs after the first hour, then the probability of a meaningful downside reversal would diminish signficantly.

We did get those higher highs, and the market was able to hold OK into the close, not giving back too much from the test of the prior closing high. Yesterday did provide one additional bearish data point to be added to what we looked at on Wednesday, however - while the S&P futures rose nearly 1%, both the BKX Banking Index and SOX Semiconductor Index closed in negative territory. Of the 9 other times this has occurred, the S&P was lower the next day 6 times by an average of -1.3%. Two of the three exceptions gave back their gains within 2 days.

Given what we discussed on Wednesday and the banking/semiconductor divergence from yesterday, I'm still looking for some short-term weakness, but won't try to fight this relentless rise if we continue to make new highs.