Snapshot Notes - August 28, 2006

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MONDAY, AUGUST 28, 2006

PostCloseSummary

08/28/06 5:00 PM EST

Coming into today, I was expecting some weakness in the early part of the week, based on the position of our shortest-term indicators and the lack of intraday volatility seen on Thursday and Friday. I was surprised to see a trend day develop in the morning hours, but as noted earlier, I don't expect it to last and I took a small short position around the noon hour.

Another concern that I have is that several of the more intermediate-term guides that I follow are becoming overbought while the market in general is doing nothing but spinning its wheels. One example is the 10-day average of the TRIN on the Nasdaq, which is under 0.70 for the first time in over a year. Even just confining our lookback to the bull market that begin in October 2002, each of the other times it became this low, any additional short-term gains were quickly given back each and every time (I can count 7 distinct occurrences).

From a short's perspective, I'm worried about the lack of liquidity this week and the willingness of buyers to step up today, but I still don't think we'll see a sustained breakout and I continue to prefer concentrating on the short side of the market. I am not pressing aggressively - I would be more willing to do so if the S&P dropped below 1290ish - but I do think betting on weakness here has the better risk/reward profile.

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

ApproachingTheBell

08/28/06 3:25 PM EST

We've been hanging around the same levels, give or take a few points, for the past three hours, not an uncommon occurrence over the past few days, and something we're likely to see more of this week. Nothing much has changed among our intraday guides or anything else I've been looking at, so I'm maintaining my same stance and outlook as noted earlier.

LunchtimeLull

08/28/06 12:25 PM EST

The indices have been holding well today, essentially enjoying a trend day heading into the lunch hour. While spikes higher and lower would not have been a surprise, I was not expecting a steady up-trending day today, and would be even more surprised if it continued throughout the day and into new highs for this move.

I took some light short exposure in the S&P futures in the past 1/2 hour and have the stop about 4 points above current levels. I'd like to be more aggressive on the short side here, but I'm concerned with the holiday-type trading and the unexpected trend day so far, so this is more of a "dip my toe in" position. I think that a breakout above the recent highs will end up being given back during the week, but in a thin tape we can move quickly in a short period of time so I'm keeping a relatively short leash on any positions.

MidMorningOutlook

08/28/06 10:25 AM EST

Good Monday morning...There has been quite a bit of talk about the weakness that we often see the last week in August. I've been asked frequently about it, and what we see is that the last 5 trading days in August have indeed shown an overall negative return for most sectors.

Following is a list of popular ETFs, how often they've shown a positive return the last 5 trading days in August, and the overall average return during that time:

QQQQ: 3 out of 7, -1.0%

SMH: 2 out of 6, -2.1%

SPY: 5 out of 11, -2.0%

XLE: 3 out of 7, +0.2%

XLF: 4 out of 7, -1.0%

XLP: 3 out of 7, -0.7%

XLU: 4 out of 7, +0.1%

XLV: 4 out of 7, -0.6%

XLY: 1 out of 7, -1.6%

The weakest of the bunch was XLY, the Consumer Discretionary sector fund. This includes companies like Time Warner, Home Depot, Comcast, Disney, Ebay, etc. I'm uncertain of any economic or technical reason why stocks should fall during this week, particularly tech or consumer discretionary-type issues, unless it's just that so many traders are on vacation that they simply fall of their own weight. Most fund managers are long-only, and if the majority of them are away, then perhaps a large chunk of the buying interest that is in the market on a daily basis just isn't there.

There is a possibility that the gap down in energy this morning could be a supportive factor for equities in general today. Curiously, though, over the past few years, whenever Natural Gas gapped down more than 5%, the S&P closed positive that day only 1 out of 4 times, so historically at least it's hard to support that view.

I noted on Friday that given the overbought nature of our short-term cumulative TICK indicator and the general tendency to see weakness after such tight-range days like we saw on Thursday and Friday, I would be more interested in looking for short setups to begin this week, particularly so if the S&P fell under 1290ish. I am concerned that the thin market will render normally reliable patterns less so, but I still don't think we're going to see enough interest to push the major indices over last week's highs and hold there.

I'll be fading a move towards last week's highs (1302ish in the cash S&P) with a stop a few points above, though I have no intention of being aggressive as we're likely to see increasingly "jumpy" price action. I would be more inclined to press the short side if the S&P lost that 1290ish area.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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