Snapshot Notes - August 29, 2006

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TUESDAY, AUGUST 29, 2006

PostCloseSummary

08/29/06 5:00 PM EST

For awhile today, it looked like we were on our way to getting the short-term weakness that was "due". The release of the FOMC minutes, however, was enough of a spark (for whatever reason) to get traders to scramble, and we got a spike into the close.

At the end of the day, we're left pretty much where we were yesterday technically, though I am even less enthused about trying to press the short side now. The pattern heading into this week was good enough that I felt it worthwhile to at least try the short side should we approach the old highs, but with the thin trading conditions and willingness of buyers to step in on every minor retracement, that's becoming higher risk than I normally am willing to tolerate.

With several of our most sensitive indicators now overbought once again (including my favorite, the cumulative TICK), I don't think we're going to go gangbusters to the upside, either. I suppose it's possible that the increasing illiquidity will enable a spike move in either direction, but trying to game it is becoming more and more fraught with uncertainty. Heading into tomorrow, with our short-term guides somewhat overbought and the major indices sitting right at the previous highs, I have a slight preference for continuing to look for more weakness than strength, but we need to be careful with these thin conditions.

Have a good evening and we'll see you tomorrow!

MidMorningOutlook

08/29/06 10:25 AM EST

Good Tuesday morning...Back in March, I went over a few things that suggested that the increasing bearish sentiment we were seeing at the time - despite rising prices - was not a "wall of worry" that would lead to ever-higher prices, but rather a negative example of increasing risk aversion (click here for comment).

In spite of the decline we saw in early summer, or perhaps because of it, the rally over the past few week has not pushed many folks back into the bull camp. Once again, we're seeing several indications that traders and investors are becoming more risk averse even though most stocks are hanging in there.

The latest example comes from the lowrisk.com sentiment survey. I went over a stat from this survey last week, and this week the responses were even more remarkable. Only 16% of respondents thought the DJIA would rise over the next 30 days, while 67% felt it would decline. This is the most bearish on the market that sample has been since last September, and the 4-week average is now showing about as much bearish opinion as was seen at most of the major lows over the past 10 years.

From a strictly-numbers point of view, any time the 4-week average of the survey dipped this low, the Dow was higher a month later 71% of the time by an average of +3.1%. The ratio of the maximum average intra-trade gain to maximum loss was rather unimpressive, though, at only 1.4 to 1 (the average max gain was +5.9% compared to an average max loss of -4.2%).

This adds to a very mixed, confusing picture among the guides that we follow. There are several examples of extreme bearishness, but I could also point to several showing the opposite. Among the studies I've looked at, I continue to find a real lack of any consistency among the results when looking out several weeks at least. When we see this kind of situation, the best bet is to look for a wide, extended trading range to form and that's still the gameplan I'm using here.

In the short-term, I noted yesterday that I was betting on a rejection of new highs in the S&P and I'm still leaning that way. I don't think we'll see a sustained breakout to new highs this week, but because of the thin trading (that's going to get thinner as the days progress) and yesterday's surprisingly consistent buying pressure, I am not at all being aggressive on the short side. That may change if the S&P would happen to lose the 1290ish level, but I'm not going to press until then.

On a side note, this will be the last intraday update for today...the next will be the Post-Close Summary posted around 5:00pm EST.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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