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[Figas]

TUESDAY a.m.
August 12, 2003



No Momentum
by David Nichols

For 10 consecutive weeks, the S&P 500 has closed out the week somewhere between 975 and 998. That's just an incredibly tight range. There's no momentum



We've seen 15 point forays up and down on both sides of these lines -- twice -- and none of these moves has gained any traction.

During such a tight tug-of-war, market participants become glazed over, and the market starts to lose some of its interest. But such a tight stand-still sets up the next big trendy move. The energy that builds up during such a slow grind can be tremendous.

Of course the big question is which way the market will break out of this tight range. The right answer, of course, is nobody knows -- especially at this point. One of the things the market is doing right now is completely devaluing everybody's argument, and simply doing nothing. There are many considered and credible opinions on both bullish and bearish sides. And one thing is for sure: few are changing market opinions during this sideways action.

The thing that will knock one side off its perch is a rush of momentum in one direction. The market has to tip its hand now before people will react, after such tight skirmishing. A big clue that something different is happening will be a weekly close that is out of this 975 to 998 closing range of the past 10 weeks.

It's unusual for the VIX to spend so much time in the low 20s, as it has a pronounced and demonstrable tendency to oscillate back and forth from low to high and high to low. Volatility will return to the markets. Some day, that is. We're seeing rumblings that volatility is on the verge of picking up, with the recent breaks down and back up through the VIX range.



With sentiment again so complacent, the break should be down in the S&P 500. But it doesn't have to be. If the market is going to rise appreciably from here, then it's going to have to manufacture some fresh bearish bets to fuel the rise. This current sentiment action isn't going to cut it. Skepticism, negativity, and implied volatility -- as measured by the VIX -- will need to rise as the market rises. That's a lot to ask. It's not impossible, but it's a tall order.

It's much easier for the market to move down to create the negative sentiment that eventually pushes prices up. But there's certainly no law that says the market has to do the "easy" thing.

Sentiment Dashboard
by Adam Oliensis



SENTIMENT TANK: Filled by 1 point to 13% full of negative sentiment.

SHORT-TERM: The hourly advance phase has tired and is now in neutral territory with a bullish bias. The momentum here has reached a sort of suspension point. It could accelerate into a "continuation buy" signal or it could roll over into a decline phase.

MID-TERM: Progressed 3 points in its decline phase to 64% but with a confidence reading that is sitting stubbornly at 0. I've highlighted the face of the gauge in yellow, between 75 and 25 on both advance and decline sides. Since Memorial Day we have not seen the mid-term gauge move outside of the yellow highlighted area. That is, the momentum of sentiment has remained precisely within the middling half of its possible range, neither overbought nor oversold. There's very little momentum of sentiment and that's no coincidence. The SPX has been consolidating the rally off the March low since right around that time.

LONG-TERM: Weekly gauge progressed 2 points to 9% on the decline side but also has a stubbornly neutral confidence reading of 0.

BOTTOM LINE: The sentiment tank normalizes itself to express the current degree of bearish sentiment relative to the levels of the prior year. Consequently, prior levels shift themselves as we look back over the prior year from different "present moments." For instance, the August 5 high on the tank (the most recent spike) was at about 26% when it happened but now reads 28% as year-ago fearful readings are replaced by this year's less fearful readings. That is, as of August 11 the Aug. 5 reading is in the 28th percentile relative to the prior year but on Aug. 5 the Aug. 5 reading was in the 26th percentile.

So...a fear spike that takes the tank up over (28%) would now represent an important surge that could continue. That would likely be associated with an SPX move down below 960 and bring into play our recently discussed downside targets (935, 915, and then 902). In the absence of such a spike, a repetition of the '91 drifty, flat-to-upwardly biased market is the one that fascinates right now. Why? Because so few "talking heads" are expecting that while the combination of the low VIX and high Put/Call Ratio moving averages may be forecasting precisely that.