Snapshot Notes - August 21, 2006

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MONDAY, AUGUST 21, 2006

PostCloseSummary

08/21/06 5:00 PM EST

After the initial morning drop, we got a tight range-bound day the rest of the way on exceedingly light volume. Turnover in the S&P 500 exchange-traded fund, SPY, was the lightest since the day before the July 4th exchange holiday and was one of the 10 lowest-volume days of the year.

For seven out of the past nine days, our daily Liquidity Premium reading for the S&P has been less than -20%, a long streak of extreme readings suggesting that traders certainly seem comfortable trading individual equities as opposed to the "safety" of a hyper-liquid instrument like SPY. The 21-day average of the SPY Liquidity Premium is now its most overbought since late June 2004.

The consistent negative seasonality that accompanies option expiration has now itself expired, and there's not a whole lot to look forward to seasonality-wise. Our intraday guides are mostly neutral, though there is a smattering of oversold readings in there.

If we would happen to get some additional weakness tomorrow - many traders I speak to are harboring concerns about the possibility of terror attacks on August 22nd - and should the day pass by uneventfully, then it's not beyond the realm of possibility to expect another push higher Wednesday. I'm not quite sure just how much the terror possibilities are weighing on traders' mindsets, so I plan on taking it easy tomorrow.

Have a great night and we'll see you tomorrow!

ApproachingTheBell

08/21/06 3:25 PM EST

Heading into the close, we see the major indices still stuck in pretty much the same tight range they've been in since the morning hours.

Our intraday guides are still mostly neutral, and not much help on that front. Historically, there is some precedent for seeing something of a rebound following a poor post-expiration Monday - about 64% of the time Tuesday has closed higher than Monday, something that has remained fairly consistent over the past couple of years. A stat often mentioned is that stocks often fare poorly the week after an option expiration, but the vast majority of that weakness is due to Mondays, so the negative short-term seasonality has already come to an end.

With the extreme overbought readings we got from a slew of technical indicators late last week, I've been thinking that we'd get more of a consolidation, and I don't think we're quite done yet. I mentioned the terror fears surrounding August 22nd, and that seems to be a factor on many traders' minds. It seems unlikely that we're going to take off to the upside tomorrow with these concerns in the air, so I'm going to continue to expect limited gains. If we go through tomorrow with no international "situations", that might be cause enough to give more weight to another attempt higher by Wednesday.

LunchtimeLull

08/21/06 12:25 PM EST

The selling pressure has continued into the East Coast lunch hour as each of the major equity indexes continue to make new intraday lows.

I went over some stats earlier regarding gap down opens on the Mondays following expiration, and so far the S&P has lost about the average amount when looking at all instances over the past decade. As noted, though, the last 10 occurrences, going back to early 2003, have been consistently more negative and in that regard we'd have to decline another 5 points or so in the S&P to meet that average (but it's best to not get too wrapped up in these historical comparisons - they're general guides only).

Our intraday indicators are still working off their overbought extremes from last week and most have a ways to go before they would suggest the selling pressure has been "too much". As such, I'm sticking with my preference for the short side in the short-term.

MidMorningOutlook

08/21/06 10:25 AM EST

Good Monday morning...8 of the last 10 Mondays following option expiration had begun with a gap up opening, but apparently terror concerns surrounding August 22nd have manifested themselves in lower prices to kick off the week.

This has been a focus of several conversations I had this morning, and could put a lid on things until tomorrow passes. If there are no actual terrorist attacks, perhaps it will be enough to spring another rally by mid-week.

Usually gap down opens like we saw today end up being more bullish than bearish, but that hasn't been the case for days following an expiry, which still shows an overall negative bias. When SPY gapped down at least 0.25% to kick off the week following an option expiration, then it closed higher than the open only 1 out of the past 10 times, with an average return of only -0.6%. Over the past decade, it has closed higher than the open 37% of the time (12 out of 32 cases). Those precedents suggest that a full recovery of today's gap is unlikely.

Our shortest-term guides are mostly mixed at this point. We're finally seeing a little jump in the implied volatility gauges like the VIX, though part of that is just because it's a Monday. I wouldn't be surprised to see these indicators continue to drift lower in the coming weeks as traders filter out for the most popular vacation time of the year over the next couple of weeks.

I'm still not expecting much in the way of sustained upside here and continue to focus on short-side trades.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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