Morning Market Comment - November 4, 2009

Good morning...We begin the day with some modest follow-through buying pressure in the pre-market futures. This isn't at all unusual on the morning of an FOMC announcement, but the afternoon could look significantly different.

Over the past couple of days, we've looked at sentiment towards sectors and broader asset classes according to big money managers and Rydex traders.

Today let's shift focus just a bit and look at sentiment towards commodities and a couple of asset classes. We saw on Monday how money managers were big fans of oil and not so much of Treasuries, so let's check that against the other measures we follow on the site.

The table below is a kind of heat map that essentially shows the probability of decline in the intermediate-term based on several of the factors we track on the Commodity page of the site.

OPINION: This is the Public Opinion data that we post. The higher the number, the more optimistic folks are that the commodity will rally.

SPECS: This is a three-year stochastic of the net position of large speculators in the underlying futures. The higher the number, the more aggressively net long these trend-following traders are.

SEASONAL: This is the percentage of time the commodity has declined during November.

The more red there is in the heat map, the more likely that commodity is to decline.

There isn't anything that's red all the way across the columns. The Swiss Franc looks pretty bearish in the Opinion and Specs columns, but seasonality-wise it shows a little bit less than 50% chance of declining.

Crude Oil has a pretty large tendency to drop during November (68% of the time), and the net long position of Specs is in the 90th percentile of the range over the past few years, but we haven't seen Opinion spike to a big degree, at least according to the measure we post on the site. We're seeing some rotation into Energy and Energy Services at Rydex, but those funds aren't quite making up 30% of total sector assets, which is when the sector has run into trouble in the past.

At the other end of the spectrum, Soybeans enjoy green coloring across the columns, but the readings are fairly tame.

Treasury Bonds show deep green levels in the Specs and Seasonal columns (since Spec positions are in the bottom 21% of their three-year range and Bonds have declined only 25% of the time during November), but again Opinion is holding it back from being green across the board. Some of the surveys we follow are showing neutral (at least) sentiment towards bonds, which certainly flies counter to what we looked at on Monday in the Big Money poll.

Let's combine each of the factors into an average and rank them according to that score. The table below shows them listed from highest to lowest, basically meaning that the ones near the top show the highest probability of running into some trouble.

There's no real surprise in the list given what we've discussed above and on Monday. Energy is well-represented near the top, with Unleaded Gas, Heating Oil and Crude Oil all showing a high probability of trouble making sustained headway.

At the other end, Bonds are in the best position, which is counter-intuitive if you read some of the fundamental arguments about the inevitability of rising rates and the confluence of major money managers who are just itching to short Bonds. Maybe that chorus of opinion has swung just a little bit too far to the pessimistic camp.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend: to	The S&P still has a rising 200-day average and a series of higher highs/higher lows, but the uptrend line from March has been broken
Support / Resistance:	With the long uptrend and recent correction, there are layers of support and resistance nearby
Other Tendencies:	Pullbacks after highs have been positive, but we're seeing more and more "toppy" kind of behavior

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration, or possibly even a new bull market. During April and May, we went over several studies that suggested that "this time is different" in terms of bear market rallies, as we reiterated in early May.

Since July, the market has consistently rallied smartly from the shortest-term oversold readings, as a healthy market does, and it has rolled over almost all hints of bearish conditions. That kind of momentum tends to persist for long periods of time.

We've seen some periodic bouts of excessive optimism along the way, 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.

Over the past week or so, we've gone over a few modestly convincing studies that show some cracks in the uptrend's potential. We're seeing some very volatile swings in breadth, a deterioration in the number of stocks rising along with the market, a number of big reversals after tests of recent highs, and a hesitation to rally from short-term oversold readings.

All of these were warning signs, and now the S&P 500 has violated its uptrend from the March low. It is still showing a series of higher highs and higher lows, and will until it drops below 1020, but the intermediate-term trend has lost one leg of its bullish stance.

Signal Strength Breakdown	Notes
Sentiment:	Our shorter-term indicators are neutral
Trend:	A clear series of lower highs and lower lows
Support / Resistance:	Most likely support from here is 1015-1020, but now resistance around 1070
Other Tendencies:	Still have positive seasonality, but the severest oversold conditions have moderated

The past few days have been very whippy, especially when consider the pre-market action in the futures as well. The S&P has been subject to 8 swings of 15 or more points in less than a week.

Typically, such gyrations are a hallmark of trend changes, but it's a pretty flimsy argument on which to rest the expectation of a rally from here. Not only that, but the market has not been successful at rallying well from oversold conditions, and on a shorter-term basis the trend of the broader market and many sub-sectors is less than inspiring.

After yesterday's sessions, our most sensitive guides are back to neutral from being modestly oversold, and in fact the STEM.MR Model for the Nasdaq 100 is already surprisingly in overbought territory.

For today, there is a consistently positive drift in the morning hours on the day of a scheduled FOMC meeting, with it being exceptionally rare to see a decline of any magnitude before the rate announcement and accompanying statement. After the release, however, all bets are off as we usually see two or three volatile swings. As usual, we'll be looking for a large move into the close either way, as that often sets up the "Fed Reversal" pattern whereby an exceptional post-FOMC move is often reversed in the ensuing day(s).