I am sure you are tired of seeing the market rise while I sit on the sidelines so I don't want to bore you too much today with reasons why I am cautious. I'll just point out two things and I'll let you go.
I talk a lot about "smart money" and "dumb money" (or emotional money) and I wanted to point out what happened yesterday. While I would never use this as a primary indicator, I suspected that the Joe Sixpack investor read his Sunday paper this past weekend and saw the results of Friday's "wonderful" jobs report and the market that is taking off. Since everything looks great, he decides that Monday morning he will call his broker and get his 1% return savings account back into stocks. So it did not surprise me that the first hour of trading (emotional money) sent the market up higher. What I wanted to see is what happened in the last hour of trading (smart money).
Chart source www.finance.yahoo.com
While the day wasn't bad overall, the profit taking, selling, whatever you want to call it showed up late. The "smart money" was selling this new high. Make of it what you will.
The other thing I want to mention is the divergence between the S&P 500 and the Nasdaq 100 (NDX - the largest 100 tech stocks on the Nasdaq). Sentimentrader.com tells me that when the Nasdaq 100 is 5% or more away from a new high when the S&P 500 has already made a new high as we saw Friday, it could be time for a pause. Interesting since my indicators have been saying that for a few weeks now.
This data is from Jason at www.sentimentrader.com. He is the king of crunching the numbers...
Over the past 20 years, there have been 7 distinct occurrences of the S&P 500 hitting a new 52-week high while the NDX was at least 5% below its own respective high. Many of them bear a striking similarity:
-
The NDX was an average of 8% below its high when the S&P hit its high.
-
The S&P topped out an average of 4 days later.
-
The S&P declined an average of 4% over the next 26 days, while the NDX was given an 8% haircut.
-
Once a low was formed over the next month, the NDX went on to phenomenal gains in the short- and intermediate-term.
For the data buffs among you, I have included a table which shows each occurrence.
|
Date |
NDX lag |
# of days to high |
# of days to low |
Loss to low |
20-day gain after low |
60-day gain after low |
|||
|
SPX |
NDX |
SPX |
NDX |
SPX |
NDX |
||||
|
12/02/86 |
-10% |
0 |
19 |
-4% |
-5% |
13% |
18% |
24% |
35% |
|
10/18/88 |
-8% |
3 |
24 |
-5% |
-7% |
4% |
7% |
11% |
15% |
|
07/29/92 |
-13% |
3 |
18 |
-3% |
-6% |
2% |
8% |
2% |
16% |
|
03/08/93 |
-6% |
2 |
34 |
-5% |
-9% |
3% |
12% |
3% |
8% |
|
11/17/95 |
-5% |
17 |
34 |
2% |
-9% |
6% |
16% |
8% |
16% |
|
02/11/97 |
-6% |
4 |
41 |
-7% |
-9% |
12% |
16% |
25% |
27% |
|
12/05/97 |
-7% |
0 |
13 |
-5% |
-12% |
3% |
8% |
19% |
28% |
|
AVG |
-8% |
4 |
26 |
-4% |
-8% |
6% |
12% |
13% |
21% |
What this is telling
us is that when the S&P 500 makes a new high and the NDX is 5% or more
away from a new high,
on average
the S&P 500 is within 4
days of a top, on its way to an average of a 26 day pullback with an
average loss of 4%. But after that the market rallies and techs
lead the way in a big way.
That's all for today. See? Not too boring. Currently 100% G fund. See you
tomorrow.
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