Snapshot Notes - August 22, 2006

http://www.sentimentrader.com/subscriber/subscriber_home.php

TUESDAY, AUGUST 22, 2006

PostCloseSummary

08/22/06 5:00 PM EST

Heading into today, my feeling was that we wouldn't see much of a move either way. Buyers had shown enough eagerness to buy last week that the first dip this week should find the late-comers lining up to get their chance to buy. But the extreme short-term overbought condition reached last week, combined with abnormally low volume and the potential for an international incident related to August 22nd likely was going to put a cap on any upside.

There are a few new longer-term signs that certainly look positive. I noted this morning that the first sentiment survey to be released that reflects last week's gains showed a surprising (and rare) drop in bullish sentiment from an already low level, something that previously had lead to a positive market two weeks forward 6 out of 6 times. We also have our ROBO put/call ratio of small options traders hitting its highest level of the past few years, all of which suggests that one group of traders that tends to be wrong often on market direction is quite cautious in here.

For tomorrow, it's really kind of a toss-up. In the unlikely instance that we do see some kind of major terror attack, the initial reaction will be obvious. In the much, much more likely occurrence that nothing happens, then there is the potential that any built-up demand from the past few days could manifest itself in a gap up opening, or at least an early morning rise.

Helping the bullish case, over the past three days the ISE Sentiment Index has averaged a reading of 71, meaning that for every 71 calls being purchased on that exchange, 100 puts were bought. That is a highly unusual reading - in fact, it is the lowest in the history of the index, going back to mid-2002. The next-lowest 3-day reading was 78 which registered in mid-October 2002, the very low of the bear market. Perhaps it is a one-off event related to the concerns of terror actions today, but regardless it is a solid sign of excessive protection being bought, which could help ignite a short-term rally.

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

ApproachingTheBell

08/22/06 3:25 PM EST

I've been mentioning that I didn't think we'd go much of anywhere today, due to the increasingly obvious vacation-induced lack of volume and the concerns over the possibility of a terror incident related to the date of August 22nd. I think that's going to hold heading into the closing bell.

Despite the range-bound market, our cumulative TICKs for the NYSE and Nasdaq are approaching their overbought levels, and we just don't often see the broader equity market make much of a sustained advance when they reach this condition. There's still a bit of room for them to reach more of an extreme, but they're already in "caution" territory. Most of our other sensitive guides are mixed at this point, and not giving a solid indication one way or the other.

I would not be pressing any positions overnight. In the unlikely occurrence that we actually do see a major international attack, the opening tomorrow would be obvious. Much more likely, the day goes by relatively peacefully and we have the chance to see a gap up open. I can't game either scenario, which is a perfect opportunity for me to earn interest overnight while being flat.

LunchtimeLull

08/22/06 12:25 PM EST

Volume is pathetic again today, and it's something we should get accustomed to as the next two weeks will likely be filled with listless, low-volume days, particularly so when entering the "lunchtime lull".

Our intraday guides have been making a migration back towards overbought, and several have already arrived, fully relieving the modest oversold signals a few were giving yesterday. I don't think we're going to go much of anywhere today as traders in a relatively illiquid market ponder the possibility of an "incident".

MidMorningOutlook

08/22/06 10:25 AM EST

Good Tuesday morning...The first sentiment survey of the week to reflect last week's trading showed a surprising decrease in bullish opinion.

The survey from lowrisk.com, which accepts responses through Sunday, reported that only 26% of respondents expected the DJIA to be higher 30 days from now, while 59% expected it to be lower. This results in a "bull ratio" of 31% compared to 33% last week, despite a 300-point gain in the Dow.

If we take a closer look at this, we see that there were 92 weeks since May 1997 (when this survey was created) where the Dow rose more than 2% in a given week. Of those 92 weeks, only 28 showed a decline in the bull ratio. And of those 28 weeks, only 6 came when the bull ratio was under 33%, as it is now. The following week was mixed to positive on average, but two weeks later the Dow was higher every time, and by an average of +2.7%.

The surveys that track individual investors, like lowrisk and AAII, continue to show moderate to extreme apathy despite the fact that the broader market has held up well and has done quite well the past few weeks. Combined with our ROBO put/call ratio, which showed that small options traders bought more puts relative to calls last week than any other week over the past few years, we have a picture of a small investor that is exceedingly nervous about the prospects for a continued rally.

In the short-term, I've been thinking that the question marks surrounding August 22nd in terms of potential terror acts would put a lid on our upside prospects until the day passed without incident. The gap down open we saw was immediately bought, however, showing that buyers have at least some interest in taking advantage of better prices.

I was surprised by the persistency of last week's buying pressure, particularly on Wednesday, so I don't think we're going to roll over into a major decline here - I imagine a drop to 1280ish in the S&P would bring in buyers - but given the extreme overbought readings we got last week, I don't think we're ready to see a sustained move higher yet, either. If so, then we're seeing a truly unusual amount of buying pressure that should take us to at least challenge the May highs.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.