Another Gap To A Record

This is getting to be a broken record, but futures are indicated to show another gap to a new high this morning.

We've looked at this several times in previous Notes since last week, and their suggestion (short-term weakness) has been flat-out wrong. That raises the probability that we're in the midst of a "this time is different" scenario and that should be taken seriously.

For what it's worth, we've been asked to show any time the futures have reached a new high for several days in a row and then show a largish gap higher, suggesting buying exhaustion.

All such dates are shown below, and it has been rare, with only three precedents since 1982 (1986-06-02, 1995-12-01, and 1998-03-02).

Each time, gains in the futures were given back, immediately in the cases of 1986 and 1998, and over the next several weeks in the case of 1995. The usual caveats apply when dealing with a miniscule sample size.

Almost everything we've looked at since Friday has suggested a negatively skewed risk/reward ratio over the next 1-2 weeks, which clearly has been wrong so far. This always raises the uncomfortable situation of sticking with something that isn't working, or being flexible and adjusting to what the market is saying at just the point when everyone else is capitulating and markets are about to turn. We still don't see enough evidence to suggest that buying into a gap up open like this makes sense on a 1-2 week time frame from a risk/reward perspective, however.