Waiting For The Positive Season

(Impatiently) Waiting For The Beginning Of The Positive Season

I've been watching for signs that the worst was in, in order to become more aggressive with the idea that initiating or adding to long positions made sense.

In particular, I was looking for a reversal, that put us once more into decisively positive territory, of the prior large gap down, or an explosion in the number of new 52-week lows on the NYSE to 800 or more, or a move in the S&P 500 cash index down to 1400 - 1410.

It was touch-and-go during various parts of Wednesday and today for all three of those conditions, but by the close none of them were actually met. As hard as this kind of constant intraday disappointment is to see, it's getting us that much closer to what appears to be a high-probability opportunity.

I'm basing that on everything that's happened over the past one to two weeks, along with some new developments. As of today, the spread between smart money confidence and dumb money confidence has moved to an extreme reading. This is not something that occurs often, and it usually pays to take notice.

Over the past decade, there have been 68 days that showed a spread this large. One month after those days, the S&P 500 was positive 63 times (93%) by an average of +5.7%.

Going back even further, the one-month return has been positive about three-quarters of the time, with an average return of +2.5%. The three-month return averaged +6.7% with 93% of the days showing gains. There are a number of other indicators flashing strongly green; excellent times to be thinking about the long side.

This November has been wicked, the worst since 2000. Over the history of the S&P 500, the current month is showing one of the very worst intra-month November drawdowns— the fifth-worst, in fact. I then checked for any other time that November showed an intra-month drawdown of at least -5%— and how the following December tended to fare.

Out of the 10 occurrences, December showed a positive return 8 times, or 80%. (although one of the two fails was barely a miss, with a -0.2% return). The overall average return for those ten Decembers was +3.1%, nearly a random December. The average intra-month drawdown was -3.1% (worse than random Decembers), but the average intra-month gain of +4.7% was quite a bit above random Decembers. Based on this type of analysis, it seems as though while December may have a chance at being more volatile than normal, we should have a better-than-average chance at seeing bigger gains.

Not much though; the market is normally up about 70% of the time.

From an entry point of view, it would be nice to see that final big whoosh day that gives us the true panic readings that we've seen a number of times at important market lows— things like that 800+ number in the NYSE new low figure I mentioned earlier. The longer we get this dragged-out drip drip action (one day up, one day down), the more it wears on early buyers and the more likely it will ultimately result in one of those "puke" sessions. Better to get it out of the way sooner rather than later.

It would have been highly unusual to see something like that today, which is shortened by the holiday and enlivened by the actions of the bit players— with everyone else having left on holiday. But maybe we'll see it on Monday with weak Black Friday reports or some other excuse. Whatever happens, we currently have a multitude of reliable metrics screaming for some kind of relief, and which consistently precede very favorable intermediate-term conditions. I'm still concerned about the technical condition of the broad indices like the S&P 500, which appear very tenuous for the near term, but other than that it seems as though this weakness should be more than made up when taking an intermediate-term view of one to three months.

So far then, if you also believe the portents of the Dow, the near term is equivocal to weak, the intermediate term is chomping at the bit to try for a new high, and the long term is BEARISH.

Normxxx    
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