A rally, a test, then off to the races?

There wasn't much follow through after Wednesday's big reversal day.  Volume was light and buyers just didn't step up.  It makes me believe we may get that one more push down to really mess with everyone who thought about getting bullish.  It may not come today or even next week, but history shows it does happen.  The positive possibility is that this week's low was the last push down.  But it's that light volume again that makes me less optimistic.   

The put/call statistic I put up yesterday (reposted at the bottom of the page) showed that we should rally after we get more than 4 days in a row of a put/call ratio greater than 1.0.  We are now at day 6.  But it also shows that we may see more weakness before that rally.  Here's another statistic that concurs with that data. 

I won't go into too much detail, but when market breadth (comparing number of advancing stocks vs. number of declining stocks) is skewed one way or the other in lopsided numbers, we have seen some nice intermediate term gains.  But like the put/call ratio, it also indicated short term weakness before the intermediate term rally.

The numbers we are seeing these past couple of weeks have only been matched a few other times in the past 40 years.  Out of the 34 days that showed a breadth volatility reading equal to or exceeding the current one, the S&P was higher after 90 days 34 times (a 100% success ratio).  But if you look at the charts below, you will see that before the big rally began, we had a smaller rally that was followed by another push down.  The dashed lines show the time of the extreme breadth readings.

            
               
            
            
                         Chart provided courtesy of  www.sentimentrader.com

The questions are, did we have that rally already?  Did we have the second push down already?  The two lows on each chart above seem to be about a month or so apart which is similar to what we have seen between this week's lows and late March's lows so I tend to think it happened already.  But these indicators are just sending the signal now.  Just over one month from now we have two significant events occurring.  On June 30 the U.S. is supposed to hand over control of Iraq.  It is also the day of the next Fed meeting when interest rates should be increased. 

Am I trying to get too cute again?  Too greedy?  There are no guarantees of course, but if someone guaranteed you a gain 90 days from now (as the above stats hint), would you mess around and risk that gain in an attempt to increase it?  It's a tough call in a tough market environment.

That's all for today.  Currently 20% C, 30% S and 50% I fund.  I may take some off the table before the weekend, particularly if we are up big in the morning.  See you on the message board.  Have a good weekend.

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