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Short-term
Outlook (1-5 Days):
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Intermediate-term Outlook (1-3 Months):
What: We will remain Neutral for now.
Why: On
April 15th, the Dumb Money pushed up to 75%, and the
spread between that and the Smart Money reached to -45%.
In addition, we got a tremendous surge in the number of
bearish (for the market) Indicators At Extremes.
That's the kind of development that doesn't necessarily
indicate an imminent market peak, but it does almost always
mean that any further short-term gains will be erased.
Now that that has happened, and volatility has exploded
higher, we have a very unusual situation with the "shock
day" on May 6th. We looked at somewhat similar days in
today's Report, and the conclusions are pretty clear - a
short-term rally is likely, followed by a re-test of the
panic low. There are some reasons to expect this time
to be different, but even so it's the template we're going
with. If we do see a re-test of the May 6 lows in the
coming weeks, by that time there is a very real chance that
sentiment will have cycled back to enough pessimism that we
could get a very decent multi-month rally.
Recent Studies:
Oversold oscillator (5/10): Bullish
Historic price momentum (4/23): Bullish
Extreme Indicator Score
(4/16): Bearish
Earnings season after a rally (4/08):
Bearish
Smart/Dumb Money extreme
(4/07): Bearish
Sentiment:
Trend:
Mixed readings.
Still pointing up. Sup /
Res:
Other:
R: 1200-1225; S: 1110 Nothing notable.
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Commodity Updates
Equity Indicators - Updates and Extremes
Post-Crash Price Behavior
On Friday, we went back and looked at prior "shock days", those
one-day whooshes that far surpassed anything traders had become
accustomed to over the past several months.
The main conclusion from that was that over the next 1-3 months, prices
were typically contained within a couple of percentage points of the
intraday range of the shock day. Prices never strayed too far
above or below that range before getting beaten back.
I think price action is more useful here than any other fundamental,
technical or sentiment measure so I want to look at the action over the
past several days and compare it to anything we might have seen before.
So what we're going to look for is any time the S&P 500 reached a
52-week high at some point during the past month, then dropped so much
that the intraday low during the past week was at least 10% below that
52-week high. After that, it had to rally at least 3% over the
past few days.
There were five instances that popped up. Each of them is
highlighted in the charts below.
What the charts show are closing prices for the S&P futures. On
top of it, I have overlaid a Fibonacci retracement from the high to the
closing low. That shows us how much the S&P subsequently rallied
from the low before it ran into trouble again (if it did). In
other words, we can see how much of the crash the rebound erased before
petering out.
April 1987:
The rally following the April '87 instance retraced almost exactly 62%
of the "crash" before rolling over again and testing the panic low.
October 1989:
In '89, once again we saw almost a perfect 62% retracement before
trouble set in.
November 1997:
Hmm, something of a pattern here. The S&P retraced 62% of the
decline, then dropped hard over the next several sessions before
bottoming.
August 1999:
In 1999, the S&P overshot its 62% retracement level just a bit, and by
only one day, before succumbing to the tendency to re-test the panic
low.
April 2000:
Once again, almost a perfect 62% retracement of the decline before more
trouble began. Prices went down to test the panic low during the
next couple of weeks.
Here's where we are now:
In our current situation, the 62% retracement is around 1175.
The suggestion from the above charts is clear - the markets had a very
consistent tendency to make up right around 62% of its crash losses
before suffering at least a short-term setback. The fact that
we're approaching that level now should at least raise a bit of caution.
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Equity Market Indicators
Notes: The relentless uptrend since the February bottom met with a couple of spikes in our bearish (for the market) indicators, and except for a small hiccup here and there, stocks didn't pay much mind.
A couple of weeks ago, we got a huge spike in the number of bearish indicators, and after a tiny hiccup, stocks went on to make another high. It was choppy and took longer than usual, but it finally resulted in those gains begin given back per usual. Now we're starting to see a move to the opposite extreme, but it's going to take awhile for the number of bearish indicators to drop off towards 0%.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Nothing notable for today.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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May
13, 2010,
7:45am EST
50% Bearish
From May 13, 1173
SPX
