Morning Market Comment - November 11, 2009

Good morning...We begin the day with even more follow-through to the recent string of up days, with several indices now threatening to break out to new yearly highs. Combined with a lack of major news and the promise of approaching holiday seasonality, there seems little to stand in the bulls' way.

The last time the S&P enjoyed 7 consecutive up days was a little over three years ago. That happened to mark a short-term peak as the S&P went on to decline 5 of the next 6 days.

Since 1928, streaks of 7 up days have gone on to 8 days 51% of the time, but after that the probability of the streak continuing uninterrupted declines precipitously.

We can see from the chart above that once the streak reaches 7 days, it goes on to 9 days less than 30% of the time, 10 days less than 20% of the time, and after that we have less than a couple handfuls of instances in the past 80 years.

There have only been two other times the S&P futures advanced for 7 days, then gapped up at least +0.5% the following morning as it is on track to do this morning. Those were 03/21/03 and 01/06/09. Both days market short-term peaks for the S&P, as over the following week it declined -2.5% and -7.0%, respectively.

Over the past week or so, we've highlighted several pieces of evidence that traders were quick to switch to the bearish side of the ledger, one of which was the AAII survey of individual investors.

The newest survey release comes from Investor's Intelligence (please click here for more information about I.I. - we receive nothing from them other than permission to post their survey data). The latest poll of those newsletter writers shows a continued deterioration in bullish sentiment.

Oddly, bullish sentiment in that survey peaked above 70% a couple of months ago, and is now below 63% despite the S&P 500 being at a higher level.

This is the proverbial "wall of worry" that pundits like to casually toss out as a reason to be bullish. We've discussed this theory many times over the years, with results that were somewhere between mixed and poor (meaning that stocks don't like to climb a wall of worry, they like to ascend the steps of ever-increasing optimism).

Anyway, let's go back to the early 1970's and look for any other time that the Bull Ratio in the I.I. survey reached higher than 70%, then fell back under 63% sometime during the next three months, while the S&P 500 was trading at a higher level. Like now.

S&P 500 Performance After Decreasing Bullishness And Higher Prices
Date	1 Week Later	1 Month Later	3 Months Later	6 Months Later	1 Year Later
06/02/72	-2.6%	-2.4%	0.9%	7.0%	-5.3%
01/24/75	5.5%	13.2%	18.3%	22.3%	35.9%
02/28/75	3.3%	2.8%	11.0%	6.5%	22.2%
03/21/75	0.6%	3.5%	8.6%	3.0%	20.6%
04/11/75	2.5%	7.5%	12.1%	4.8%	19.2%
10/13/78	-6.4%	-9.4%	-5.3%	-2.5%	-0.2%
05/31/91	-2.7%	-4.8%	1.1%	-3.7%	6.5%
04/17/92	-1.7%	-1.4%	-0.3%	-1.0%	7.9%
06/26/98	1.2%	0.7%	-10.0%	8.2%	16.1%
03/05/99	1.5%	1.4%	2.1%	6.4%	10.5%
02/17/06	0.2%	1.6%	0.3%	1.2%	13.1%

Average	0.1%	1.1%	3.5%	4.7%	13.3%
% Positive	64%	64%	73%	73%	82%
Any random time...
Average	0.1%	0.5%	1.5%	3.1%	6.6%
% Positive	55%	58%	61%	64%	66%

We can see from the table that the S&P's performance was pretty good going forward, but not outstanding. There was a cluster of occurrences in 1975, mainly due to extreme volatility in the sentiment survey.

Overall, the S&P showed better-than-average returns, and more consistently so, across all the time frames, particularly the longer out we looked. There were some hefty drawdowns on the some of the smaller time frames, reaching into (or near) double digits a couple of times, so these periods didn't necessarily coincide with times you could simply buy the "wall of worry" without worrying a little bit yourself.

The recent pullback in sentiment is probably a good thing for stocks, but we've already seen a big push to new highs and we'll likely see sentiment rebound quickly as well. Some of these longer-term surveys just don't have the kind of turnaround that daily data like the Rydex fund flows have, so we'll have to wait and see, if the breakout to new highs sticks, just what kind of impact that will have on some of these longer-term sentiment measures.

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 mostly back to neutral
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:	Tendency to pull back after many consecutive up days

The market has so far continued to show signs that the environment we've been in since July hasn't changed all that much.

We had some preliminary signs that that was the case - a broken uptrend line, an inability to rally immediately from short-term oversold conditions, etc., but we've rallied for more than a week straight now and the indices are looking like they're going to roll right over the overbought conditions that were triggered on Monday. Just like they did in July. And September. And October.

With seven straight up days, the probability of the streak continuing uninterrupted is small as we can see from the chart at the top of this comment, and it's especially so when the day starts off with a fairly large gap up to a new high. These things just don't often last - they tend to be more exhaustive than anything.

Because of that, I'll be looking for prices to fade, especially if we gap up to a new high then trade back below it - the famous "oops" trade made popular by Larry Williams. That level is around 1098 in the futures. Like usual, however, if the market can sustain the breakout during early trading and go on to make new intraday highs after the first hour, then there is no way I'd be trying to step in front of that momentum.