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Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Short-term
Outlook (1-5 Days):
Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Intermediate-term Outlook (1-3 Months):
What: We will move back to 25% Bullish if the
S&P 500 cash index rises above 1093, and turn back to
Neutral if it subsequently trades under 1065.
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
on
May 7th, and the conclusions were clear - a
short-term rally was likely, probably being capped at a
62% retracement of the crash, then a re-test of the
panic lows. We're in the process of that re-test
now. We've looked at quite a few intermediate-term bullish
studies over the past week, but continue to feel that for
now we will most likely see more back-and-forth trading
before a sustained multi-week bottom is in place.
Since we are now at (actually, past) the bottom end of that
range, and have a significant number of extremes, we will
look to become modestly bullish on a reversal.
Recent Studies:
Oversold Indicator Score (5/21): Bullish
Breadth thrusts (5/11): Bullish
Oversold oscillator (5/10): Bullish
Historic price momentum (4/23): Bullish
Extreme Indicator Score
(4/16): Bearish
Sentiment:
Trend:
Many examples of extreme pessimism.
Still pointing up. Sup /
Res:
Other:
R: 1180; S: 1056 Nothing notable.
Go to: Top |
Short-term Outlook
| Int-term Outlook |
Equity Updates |
Indicator Summary |
Commodity Updates
Equity Indicators - Updates and Extremes
Over the past
week, I've seen something that would be hysterical if it wasn't so
frustrating. From different commentators (and sometimes the same
one), I saw quotes that we were seeing "classic bear market behavior"
last Tuesday and even on Monday, and that we were seeing "classic bull
market behavior" on Friday and again on yesterday. The reasoning
behind all of them was how the market behaved right after the market
opened, and again right before the close. Supposedly, the
"dumb money" trades during the opening minutes, while the "smart money"
trades during the final hour or so, after they see how the session
develops. So if the market declines during the first half-hour,
but rises during the last hour, then that's a good thing since it means
the dumb money was selling while the smart money was buying. We
track this on the site, using the S&P 500. The Smart Money
Index will rise if the market declines during the first half-hour and
rises during the last hour, and it will drop if the market rises during
the first half-hour and declines during the last hour. In other words,
if the SMI rises, then it means the smart money is more eager than the
dumb money, and vice-versa.
But this is very
curious - since we've been tracking this in 1998, exactly the opposite
of what we would assume has occurred. During bull markets in the
S&P 500, the SMI has declined consistently and precipitously. And
during the two bear markets, the SMI rose substantially both times. In the fall of
2008, the SMI exploded higher. Why? Because we were getting
massive gaps down at the open (dumb money selling?) and often rallies
into the close (smart money buying?). During much of 2009, though,
we were seeing gap up openings and soft selling into the close (or at
least less buying than there was at the open). Overall, during bull
markets you would have made a net +1145 points by holding only during
the first half-hour of trading and only +31 points by holding during the
last hour. During bear
markets, you would have netted -802 points holding during the first
half-hour and +106 points holding during the last hour. That is opposite
of how it should work - if we're gaining during the opening half-hour
but losing during the last hour, then we should be in a bear market
according to theory. According to actual history, though, chances
were much greater we were in a bull market. I will say there
is one exception to this, and it's really the only way I use the SMI.
When prices are falling dramatically, and then we see a spike in the SMI
over a period of several days, then I consider that a positive.
Usually it means we're seeing big gaps down and then late-day
recoveries, and when that causes a sharp rise in the SMI, it's a decent
bottoming signal. But it has to be very sharp. We're getting
some indications of that now, as the SMI has jumped 10% since May 13th.
That's one of the largest 8-day jumps we've seen in the past 12 years,
and has been an OK indicator of a short- to intermediate-term low.
Go to: Top |
Short-term Outlook
| Int-term Outlook |
Equity Updates |
Indicator Summary |
Commodity Updates
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Equity Market Indicators
Notes: In mid-April, we got a huge spike in the number of bearish (for the market) 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 close to seeing the opposite condition, with only one bearish extreme and more than 30% of our indicators at a bullish extreme. That's the most since March 2009, though we must be aware that it has gotten as high as 50% - 70% at some of the true panic lows over the years. So it's certainly more positive for the market than it was in April (obviously), but not quite to the point where we'd feel confident suggesting that this particular measure is at a true historic extreme.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
CRB Index
There has been quite a bit of chatter about the just-triggered "Death Cross" in the CRB Commodities Index, which many use as a proxy for commodities in general.
This is assumed to be a major sell signal, which occurs when the 50-day moving average crosses below the 200-day moving average.
Selling when the 50-day crosses under the 200-day and buying when it crosses back above works terribly in stocks, but perhaps it's different in commodities, which tend to trend more often.
Well, since 1956, there have been 34 of these Death Crosses. If we sell short at the Cross and buy back when it ends, we would have had 38% winning trades (meaning that the CRB declined 38% of the time).
That extremely low winning percentage is typical of trend-following systems. You just have to hope that the few winners are big enough to offset the many losers. Periods like after the last Death Cross in 2008 are an example.
Overall, you would have netted +61 points by shorting the Death Cross and covering when it ended, so there was a positive outcome even with the small winning percentage. The average winning trade was +7.4% versus an average loser of -5.3%. The largest drawdown, though, was -179 points, since you would have had to endure six straight losing trades over a period of 6 years heading into 1980 that really racked up the losses.
The table below outlines each trade and how the CRB performed going forward.
Remember, these are short trades, so if the numbers are positive in the table, then that means the CRB Index declined. If the numbers are negative, then it rallied.
This would be a really tough system to trade, especially lately. Nothing more than a coin flip, basically.
I would not take this Death Cross to mean much of anything if investing in commodities.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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May
26, 2010,
7:45am EST
Neutral
From May 25, 1049
SPX
