Snapshot Notes - August 30, 2006

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WEDNESDAY, AUGUST 30, 2006

PostCloseSummary

08/30/06 5:00 PM EST

We knew coming into this week that we would see several days with low volatility and increasingly low volume. That's the way it is when we combine end-of-summer vacations with an upcoming holiday.

That low volatility has manifested itself several ways, such as the exceedingly tight intraday range we saw today in the major indexes. Another way to look at it is via the bullish and bearish trading bands (the dotted green and red lines) on our short-term STEM.MR model. If you take a look at the chart, you can see that the bands have become very close together over the past couple of days and now aren't very far apart at all - a reflection of the non-movement in the component sentiment gauges.

The interesting thing is that looking over the past few years, every time the bands have become this close together, the S&P began a move of at least 20 - 30 points within a day, almost always counter to the direction that caused the bands to pinch. In other words, if the bands pinched together while the market was in a short-term downtrend, then we usually got a 20-point rally; if the market had been rallying, then we got a sell-off. Sometimes it took a day or so before the move began, but it was very consistent (8 out of 9 occurrences lead to at least a 20-point counter-trend move).

Continually looking for short setups this week has been only slightly less enjoyable that ramming my head against a concrete wall, and the risk of trying to short here remains the low liquidity (that's bound to become ever lower as the next two days progress) and the persistent buying pressure. Also, as you can see from the Seasonality section of the site, the trading day before Labor Day has had an extremely consistent positive bias (up nearly 80% of the time), so pushing the short side looks like we'd be spitting into the wind even more than usual.

I'm not a big fan of trying to buy here either, though perhaps scalping from the long side on Friday wouldn't be such a bad idea if one has to be in front of the screens. Given the position of our short-term guides and the price patterns we've seen, if we do get an upside breakout in the next two days, I don't think it will last, but trying to short now is fraught with risk and we need to be aware of that if attempting it.

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

ApproachingTheBell

08/30/06 3:25 PM EST

We continue with the major indices stuck in an exceptionally tight range, as the S&P has not moved more than 5 points from intraday low to high today. I noted this before, but over the past two years, any time the S&P has had such a tight coil intraday, its return 3 trading days later was an average of -0.7% with only 5 of 19 instances being positive.

With equities essentially not moving all day, our intraday guides haven't changed much, either, and neither has my outlook. The patterns and our shortest-term guides suggest weakness is more likely than sustained strength going forward, but the persistent buying pressure and thin market this week make pressing aggressively on the short side a higher-risk endeavor than it would be normally.

LunchtimeLull

08/30/06 12:25 PM EST

So far today we've been stuck in one of the tightest ranges of the year, other than May 8th and May 9th. Our intraday guides haven't changed that much with the lackadaisical trading, and are still mostly overbought. The STEM.MR model on the NDX is now down to 16%, a reading that has been eclipsed only three other times this year - March 15, June 2 and July 3.

My outlook hasn't changed with the range-bound trading - I've been surprised by the willingness of buyers to step up this week but still expect more weakness than strength from here.

MidMorningOutlook

08/30/06 10:25 AM EST

Good Wednesday morning...The "graddaddy" sentiment survey, Investor's Intelligence, released their latest results this morning showing a slight uptick in bullish opinion (to 42.1% from 40.0%) and a modest drop in bearish opinion (to 33.7% from 34.7%).

Like the lowrisk and AAII surveys, we're still seeing a large contingent of bears despite a market that overall has held up quite well. The bull ratio in the I.I. survey is still below where it was at the major market bottoms over the past couple of years. Again, this could prove to be a shorter-term positive for equities, but as noted this spring, low bullish opinion in the face of rising prices is not a guaranteed recipe for a bull market.

In the short-term, the major indices have spent the last couple of hours flirting with their multi-week highs, and despite modest overbought conditions from our short-term indicators, we see very little selling pressure. We're likely seeing quite a few short-term traders trying to pick a top here, selling each time we approach the old highs, so if we breakout to the upside, I would expect some kind of very short-term spike as they cover and buy stop orders get hit. The bigger question would be whether such a breakout would be sustainable - I don't think it would be, but I've already been surprised by the persistent buying pressure this week.

On the NDX, our cumulative TICK is also overbought, and the price oscillator just hit a very stretched reading of 66%, so considering that index remains below its previous high, I'd be very surprised (once again this week) if we saw a sustained breakout in that index this morning.

I noted yesterday that I still had a slight expectation for lower prices here than higher ones, based on our short-term guides, but given the buying pressure we've seen and the thin tape, I'm leery of pressing too hard on the short side.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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