Snapshot Notes - August 31, 2006

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THURSDAY, AUGUST 31, 2006

PostCloseSummary

08/31/06 5:00 PM EST

Earlier today, I noted that we were in the midst of the 2nd-tightest intraday range since 1996. I doubted that it would last, and it didn't...but just barely.

We still ended up with one of the tightest ranges in the past decade. Interestingly, the six other times in the past two years we've had this small of an intraday range, the S&P was negative three days later all 6 times, by an average of -1.2%.

Tight ranges and insipidly low volume aren't a surprise for this week, but still the precedents are negative when we look back at prior occasions, even if they were caused by light holiday trading. Given those precedents and the condition of our shortest-term guides, I continue to think that an upside breakout here is going to be short-lived and we'll soon be seeing lower prices.

Our Smart Money Confidence has now dipped down under its lower threshold of 40%. This is only the third time since 2002 that it's done such a thing, the other two being early January 2004 and late March 2006. Please note that this is not a precise timing indicator - it is best used as a gauge of the general market environment, which is now starting to become more negative than it has been in some time. I would be more inclined to exit all longs if the Dumb Money shot up over 60% (that's a better timing measure), and so far it's still holding below that level at 54% as of today's close.

The precise timing of a potential short-term failure here is the tricky part due to the thin trading conditions and, especially tomorrow, the positive pre-holiday seasonality. The trading day prior to the Labor Day holiday has been positive about 80% of the time historically with a decent average return, though the payroll report could throw a big wrench into that.

I noted yesterday that the bullish and bearish trading bands on our STEM.MR model had pinched together to an extreme degree. We've seen similarly tight bands 9 other times since the beginning of 2004, and all 9 times the S&P began a move of at least 20 points within a day (and 8 of those times the move was counter to the short-term trend). With the pending holiday, it's not a shock to see such a potential move delayed, but I do expect such a thing to occur imminently. My expectation is that the move will be to the downside, but either way we should get ready for what will surely prove to be better opportunities than we've seen this week.

ApproachingTheBell

08/31/06 3:25 PM EST

Buyers are giving it their all to get us over the hump of the prior highs, and they know they've got the wind at their backs for tomorrow.

If they do manage an upside breakout through tomorrow, I'm unconvinced it's going to hold, but I'm not going to try to short again unless we see some confirmed weakness or failure. I may even consider holding my nose and scalping from the long side tomorrow given that day's pronounced bullish bias, but scalps are all they'd be.

LunchtimeLull

08/31/06 12:25 PM EST

We were expecting several tight-range days this week, but this is getting ridiculous. If the S&P stays within its current intraday high and low (which I doubt it will), then this would be the 2nd-smallest intraday range since 1996, second only to 12/29/04.

With such a lack of movement, there's nothing new to go over. Our intraday guides are pretty where they've been for the past day, though the skewed TRIN reading this morning is pushing our STEM.MR models outside of overbought territory. That's an abnormal reading based on the gap in JDSU, so don't read anything special into it.

MidMorningOutlook

08/31/06 10:25 AM EST

Good Thursday morning...We start the day with the lowest opening-hour volume since December 29th, an indication that the next two days are going to be toss-aways in terms of turnover.

One thing that's standing out to me this morning is the TRIN on the Nasdaq. Despite technology being generally positive on the day, the TRIN is giving a reading normally associated with extremely oversold conditions as it is over 2.0. The reason is because there is little volume flowing into issues that are positive on the day versus those that are down on the day. This is probably due mostly to JDSU which is gapping down on huge volume, so I wouldn't read too much into that figure this morning.

Other than the TRIN, our intraday guides are mostly unchanged, and still relatively overbought. I noted yesterday that given the position of our indicators and the price patterns we've seen, I continue to expect more weakness than strength going forward, though we have to contend with the exceedingly light trading conditions and the very consistent positive seasonality normally seen the day before Labor Day. The end result is that other than possibly scalping from the long side on Friday, I don't want to be chasing upside breakouts here, but pressing the short side is considerably higher-risk than usual.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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