Morning Market Comment - November 17, 2009

Good morning...We begin the day with flat pre-market futures (so far) as we await another round of economic data and hints about how traders are going to treat the latest breakout to new highs.

Gold has been every bit as strong as equities, stronger even, and along with another surge to another new high, it has risen 8 out of the past 10 days. While impressive, that's not a terribly uncommon streak for it to enjoy.

Two months ago, we looked at sentiment in the Gold market, and from that concluded that while optimism had predictably picked up along with the breakout over $1000, we weren't seeing the kinds of readings that would suggest that stepping in front of new highs in the metal was a good idea.

With its continued rise, let's revisit those measures and see if there has been much of a change given that the breakout has clearly held. The red dots on the chart show where the readings were on September 15, the time of the last comment.

Curiously, we haven't seen much of a change in Small Speculator positions in Gold futures, or our Public Opinion data. In fact, both are modestly below where they were two months ago.

The same can't be said for the Rydex family of mutual funds, where traders have once again jumped on board with precious metals. Fund assets have increased 56% since mid-September and are currently greater than $300 million.

That's on a par with what we've seen prior to past short-term (at least) peaks in Gold, but in an unusual development, that $300 million only accounts for about 25% of sector assets, which is actually down from the 30% or more that we've seen at past short-term peaks.

Surely we're not seeing much optimism here, and in fact the opposite case could be made.

Remarkably, we've seen open interest in Gold put options climb significantly higher to open interest in call options. That's likely due to hedging of longs in underlying Gold positions, but whatever the reason it's on a par with the lowest levels we've seen in the past year and a half.

That kind of increased hedging behavior is not consistent with a market that is experiencing a bout of excessive speculation.

One thing that does stick out is the latest survey among Bloomberg users. Nearly 95% of respondents were bullish on the metal, a new record (though the survey's history is short).

The survey has a mixed record at pinpointing turning points in Gold, with the lowest readings doing a better job at highlighting bottoms (which makes sense given the uptrend).

The prior highest reading was just over 90% in mid-to-late January of this year. It's hard to conclude anything from one instance, or the fact that Gold was either up, down or flat after that depending on your time frame as it went through an exceptionally choppy, volatile couple of months.

In September, we didn't have a confluence of readings suggesting too much bullishness regarding Gold, with really the only stickler being an extreme net long position among small speculators. Now we still don't really have that confluence. Small specs are still near a record net long position, and Rydex traders have jumped on board too, and that is again a short-term concern. The Bloomberg survey is too inconsistent, with too short a history, to be a major worry, so I'm still not seeing a whole lot which would augur anything more than another short-term pause.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend:	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 breakout to new highs has held (so far). 1120 is a popular projection of resistance, and 1150 after that
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 few weeks, we'd seen a few modestly convincing studies that show some cracks in the uptrend's potential. We were getting 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 broke 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 convincingly bounced back. That's very healthy behavior, and if the S&P can hold above 1100 for more than a day or so, then there will be little to complain about regarding its performance.

Signal Strength Breakdown	Notes
Sentiment: to	Our shorter-term indicators are mostly neutral
Trend:	The S&P is stuck within a range between 1020 and 1100
Support / Resistance:	Former resistance at 1100 now becomes potential support from those who missed the breakout
Other Tendencies:	Nothing notable

For the past three times (just enough for traders to discover a pattern and try to profit from it), the market has rallied into monthly option expiration, chopped back and forth for the next four days (give or take a day), then dropped into a larger decline.

This time, the week following expiry will include consistently positive Thanksgiving seasonality, so it would be unusual to see a sustained correction then, particularly early in the week. Following the holiday, seasonality turns negative if anything so we'd probably have a better chance for some let-down nearer the end of the month.

Another consistent pattern has been to see a short-term market peak when 0% of our indicators are trading at a bullish (for the market) extreme while 30% or more are at a bearish extreme. As of yesterday's close, we're oh-so-close to triggering that setup again, with 0% bullish and 27% bearish. The best chance to get that latter number over 30% would be upside follow-through today.

If we do see enough follow-through to move more than 30% of our measures into bearish territory, then I'll be more willing to look for some downside ahead. Monday and Tuesday next week seem all but off limits to any meaningful decline, so the best chance for lower prices would be the latter half of this week or beginning after the holiday break. If we retreat back below 1100 today, then it would raise a big red flag - not only the apparent failed breakout, but also the fact that the retreat came with less of an extreme among the indicators.