Morning Market Comment - November 10, 2009

Good morning...We begin the day with some modest selling pressure in the pre-market futures. Yesterday started out well for the bulls and just kept getting better, leading to the sixth straight gain for the S&P 500.

This is the 27th time since 1928 that the S&P has increased for the first six days of a new month. Out of the previous 26 occurrences, 18 of them (69%) went on to score further gains during the rest of the month, with an average return of +1.0%.

It wasn't a failsafe buy signal, as there were several large declines (November '69, June '74, September '78 and October '89 included). However, overall it did lead to better-than-random gains and more consistently too. It happened only twice on previous Novembers, in 1960 and 1969, which led to returns of +0.3% and -4.6%, respectively, into the end of the month.

The big problem with this rise, according to many, is that volume has declined every day of the advance. I do show that NYSE exchange volume has dropped every one of the six days, but not composite volume.

Going back to 1940, there have been exactly...zero...days when the S&P rose six days in a row and exchange volume declined those same six days. So we don't exactly have a large sample size there.

If we back off and require only five days in a row, then we come up with a whopping 1 instance, from May 3, 1993. I don't see anything too bearish about that one - the S&P was up 2.6% over the next month and rose steadily for the next nine months.

If we back off yet again and only require four days in a row, then we get a more satisfying 15 occurrences. But it's still hard to say anything particularly nasty about them - the S&P was higher a month later 60% of the time and sported an average return of +1.6%. If the S&P was within a few percent of a one-year high at the time, then it was up a month later 5 out of 7 times, with an average return of +1.5%

Yesterday was also notable due to its "trend day" status. It was one of those rare days when everything was in gear, and the bears managed barely a whisper.

It's hard to define trend day in retrospect, but one of my main determinants is price action at the NYSE TICK (the number of stocks that last traded on an uptick minus those that last traded on a downtick). During a trend day, the S&P 500 should open near the low of the day, and close near the high of the day. Also, the TICK should be skewed very positively all day long.

Let's go back to 1998 and define these as days when the S&P futures opened in the bottom 10% of the day's range and close in the top 10%. Also, every half-hourly bar of the TICK had to show a high that was greater than the absolute value of the low. That gives us days when there was very little selling pressure during any part of the day.

Over the past 11 years, there have been 55 of these days, the last one being May 26th. There have been three of them since the March low, and while the futures declined the following day two of the three times, the pullbacks were modest (retracing less than half of the trend day's gain) and led to new highs each time.

Historically, trend days led to inconsistent performance going forward. The following day the S&P rose 55% of the time, but showed an average return of -0.1%. A week later, it was up 58% of the time with a return of +0.1%. There wasn't a big difference whether the day gapped up to start the day.

Overall, I can't find anything especially derogatory about yesterday's session, either given the volume pattern or the potential buying power used up by the persistent intraday trend.

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:	The 1020 area should be support, and the S&P easily re-captured 1070 resistance - 1100 is just ahead
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 the S&P subsequently violated the uptrend line from March. However, during the recent correction we also saw investors quickly switching to the "excessive pessimism" side of the ledger, and the market has quickly bounced back. That's very healthy behavior, and if the S&P can break out over 1100 and hold for more than a day or so, there will be little to complain about regarding its performance and ability to bounce back from what looked like a potentially larger correction.

Signal Strength Breakdown	Notes
Sentiment:	Our shorter-term indicators are extremely overbought
Trend:	The S&P is stuck within a range between 1020 and 1100
Support / Resistance:	Most likely support from here is 1015-1020, and resistance around 1100
Other Tendencies:	The short-term tendencies are mixed with no clear edge

Yesterday's trend day served to push many of our shorter-term indicators into the red-light district.

The STEM.MR Model is very near what is for all practical purposes a maximum extreme, supported by historical extremes in indicators like the Price Oscillator.

The Short-term Indicator Score has also flipped to an extreme overbought condition, which is very unusual to see so soon after becoming extremely oversold just a little over a week ago. In fact, this is one of the few times in the past 10 years we've seen such a quick switch, and the others usually occurred near major inflection points like after 9/11, the fall 2008 lows and more recently early July of this year.

These extreme overbought readings and sustained price momentum very often indicate buying pressure that will not go into the night quietly - usually we see additional upside follow-through in the week(s) ahead. The times when it does fail, though, it usually fails right away, like within a day or two. So the bears' best hope for these overbought conditions to lead to a meaningful decline will be almost immediate, especially with the S&P challenging its recent highs. A breakout over 1100 that hold for more than a day or two will just be more confirmation that things haven't changed much at all since July.