Morning Market Comment - October 15, 2009

Good morning...We begin the day with some weakness in the pre-market futures as the morning's economic releases weren't quite enough to make up for apparently disappointing earnings from Goldman and Citigroup, and more jawboning about a stronger Dollar.

If there is one word that could most aptly describe sentiment over the past couple of weeks, it would be "stagnant". Despite a repeat of a relentless move higher ala July and September, we haven't seen much movement in many of the measures we track. The Smart Money and Dumb Money Confidence indexes have been stuck at 38% and 54%, respectively, since the end of September.

The most recent updates of a few indicators we track are par for the course. There was a slight uptick in bullishness among individual investors, but corporate insider activity continues to meander around "not enough buying" levels, and even Japanese margin traders have been having a tough go of things.

That Bull Ratio reading in the AAII survey is one of the highest we've seen over the past year, and while it did lead to a choppy / down market after similar readings in October 2008 and again January and May of this year, it didn't have any negative impact whatsoever when bullishness was even higher in late July.

The corporate insider readings have to be taken with a grain of salt for now. There is a bit of an excuse for the lack of movement there - we had the Columbus Day holiday so there was one less day of activity, but even more importantly we're in the quiet period around earnings when activity trails off.

Yesterday we took a look at how the market has responded in the past after gapping up on the heels of a pop higher in Intel during earnings season. Over the next couple of sessions, there typically hasn't been much upside from the time of the gap. Yesterday pushed the boundaries of the averages, so already that suggestion of short-term weakness is suspect, but it's still something to keep in mind here.

I thought it would also be interesting to look for any time the futures gap up to its highest opening in a year, closed higher than the open (like yesterday), then gapped down at least -0.5% the next morning (like it is on track to do today). This is sometimes referred to as evidence of a buying exhaustion, so let's see.

This pattern has occurred 9 times since the inception of the futures in 1982. Over the next 3 sessions, the S&P managed to climb higher only 2 times, and sported an overall average of -0.3%. That average return isn't too horrible, nor is the fact that the maximum loss over the next few days (-1.3%) was only slightly greater than the average maximum gain (+1.2%).

08/03/87: Choppy short-term, rallied for a week, then rolled over into the '87 crash

05/06/97: Choppy short-term, then rose modestly for a month before a strong rally

Overall, the results weren't too positive over the next few weeks. Really only one occurrence (in April 1983) didn't show much in terms of ill effects after a bit of short-term choppy trading. The rest either began an immediate weeks-long correction or in a couple of cases rallied for 1-3 weeks before giving all the gains back. Either way, it suggests a period of choppiness at least in the short-term.

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:	The market is trading at a new high, little resistance until 1100 - 1120
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 from a couple of weeks ago. Right in line with its precedents, it has recovered well, and so we continue to see very little evidence of major topping action. We don't have too many sentiment measures arguing that we're seeing long-term signs of excessive optimism, and the technical action of the market has been superb. Until either one of those changes, there isn't much reason to expect a major change from what we've seen over the past six months.

Signal Strength Breakdown	Notes
Sentiment:	Our short-term guides are mostly back to neutral
Trend:	Short-term moving averages are pointing higher, the S&P futures have hit a new high
Support / Resistance:	Yet more new highs for the futures
Other Tendencies:	The market tends to pull back after consecutively strong sessions and big gaps up

Obviously, after yesterday's session there is once again no question that the market continues to do what it should in order to maintain the appearance of health. It rallies off the slightest hints of oversold conditions, and shrugs off any potential technical resistance.

Our short-term guides are still mostly neutral, certainly not giving off any readings that would help to negate the strong trend and lack of overhead resistance. About the only negatives here are "other things" like the tendency to fade from strong reactions to Intel earnings reports and the current setup with the gap openings. But on their own, that's not enough to have high conviction that this relentless buying pressure will end. It is enough, though, that I don't want to be a buyer into it.