Morning Market Comment - November 19, 2009

Good morning...We begin the day with some rather heavy selling pressure in the pre-market futures. One of the popular excuses being blamed for the selling is renewed momentum of a "trader transaction tax" in Congress. It's yet another completely asinine idea (the stupid taking from the innocent to give to the lazy), but I'm leery that it's playing any major part in today's weakness.

There are some possible market-moving reports at 10am today, then there's nothing until next week when we get walloped with economic data on Tuesday and Wednesday.

One of the many pieces of data that was showing a major buy signal this spring was the ratio of buying to selling pressure by corporate insiders. At the time, they were buying up nearly historic levels of their own companies' stocks, which turned out to be a great move.

Not so great, however, was that they switched quickly. By the early summer months, the ratios we follow had moved to the opposite extreme, showing much more selling than buying interest.

It is believed that insider selling is a less effective indicator than insider buying, since they buy for really only one reason - they are confident in their companies' prospects - but they sell for many reasons such as diversification, estate planning, the purchase of a second (or third or fourth...) home, etc.

That makes sense, and there is some evidence to that effect. Generally, insider buy signals tend to work better than sell signals, no matter the market environment. That's not to say we should simply ignore the sells, though.

The latest data from the excellent InsiderScore.com service shows that corporate insiders continue to have a buy/sell skew that tilts heavily to the sell side. This week, the ratio popped back over the threshold that we can consider to be extreme.

Over the past six years, such extremes have been a good heads-up that whatever short-term gains the market managed to add would be given back over the ensuing months. That hasn't worked this year (obviously) as the major equity indexes continue to power to new highs.

Still, it's a bit concerning that selling pressure picked up yet again, but even moreso is where that selling was concentrated. Let's look at the ratio for the stocks in the Nasdaq 100:

The ratio just flew off the charts, hitting a new record since the data was compiled in 2003.

There were two previous weeks that saw a big spike close to the current one, on November 22, 2005 and November 21, 2006. Those dates are extremely close to the current one, raising the possibility that what we're seeing is somehow related to seasonal factors in the data. I don't have a good idea of why that may be (the re-opening of insider windows after third-quarter earnings releases?), but other years don't necessarily show similarly skewed seasonal spikes.

Whatever the reason, those other two dates coincided with periods where the Nasdaq 100 was close to trend exhaustion, as prices lurched back and forth, at best, for the next several months.

There was a spike in selling in early August this year, which didn't result in anything but a few weeks of choppy trading. Perhaps that's the worst that will follow this extreme, too, but given the record level of the ratio, and the extended nature of the price rise, it seems like a bigger warning sign than that...especially if the NDX falls back below its 1780 breakout level.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend:	The S&P has a rising 200-day average and a series of higher highs/higher lows
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've seen some "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 so far the S&P has held above its 1100 breakout level for two days. It's threatening to drop back below there this morning, however, so it remains an area to watch carefully given the "topping" warning signs.

Signal Strength Breakdown	Notes
Sentiment: to	Our shorter-term indicators are mostly neutral
Trend:	The S&P has hit a new high and held
Support / Resistance:	Former resistance at 1100 now becomes potential support from those who missed the breakout
Other Tendencies:	Nothing notable

Since the July low, there have been 7 opening gaps of -0.75% or more in the S&P 500, and all but one saw the index close higher than the open, so lately these larger gaps have resulted in quick rebounds.

Historically, there have also been 7 gaps of this size when the S&P closed the previous day at a 52-week high (it didn't do that yesterday, but missed by only 0.5 points). All but one of those 7 cases closed higher than the opening price, returning an average of +0.6%.

However, 6 of those 7 instances also coincided with short-term market peaks. Buying the equivalent of today's close and holding for a week resulted in negative returns each time but once, with an average drawdown (i.e. maximum loss) of -3.4% compared to an average maximum gain of only +1.2%.

I could find no particular edge when the gap open was on the Thursday of an option expiration week (or any day during option expiration for that matter).

Our shortest-term guides are still mostly neutral after the small-range days the past couple of days, though the Indicators At Extremes continues to hover near "warning!" territory with 0% bullish (for the market) and 27% bearish. Since March, the S&P has formed a short-term top quickly after the bearish percentage hit 30% - we're not quite there, and I'm not sure if I'm just nitpicking by not considering it bearish already.

Today's early trading should give a very good clue about the day's prospects. Given the stats above, the S&P has had a decent tendency to quickly rebound from these kinds of gaps, and if we're going to recover, then it should be soon after the open.

But if we gap down by this large of an amount - especially below the 1100 area - and continue to set lower lows after the first hour of trading, then we should be set for a lower close, and potentially something more substantial given the Indicators At Extremes, the insider data mentioned above, and renewed prospects of a "false" breakout above 1100.