Snapshot Notes - September 5, 2006

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TUESDAY, SEPTEMBER 5, 2006

PostCloseSummary

09/05/06 5:00 PM EST

A few times last week, there were good reasons to begin looking for very short-term pullbacks. With one or two exceptions, we either didn't get them, or they were very muted. Contributing factors to that were perhaps the low liquidity and positive pre-holiday seasonality.

If so, we don't have those same factors in play this week, yet prices continue to rise. This is making me increasingly uncomfortable in looking for a pullback, as I don't want to continually look for something that isn't going to come - when prices don't act how we think they should, then we need to get the message at some point.

More signs are cropping up that this move is more likely to fail, such as a negative divergence with our short-term TICK indicator mentioned this afternoon. I wrote this morning that the major indices are close to obvious pivot points that I am going to use as "uncle" points to determine if I'm just flat-out wrong about expecting the price rise we've seen over the past week to fail. Those pivots are new highs in the S&P 500 and DJIA, and the June high and downward-sloping 200-day average in the NDX.

As the indices approach those pivots, I'm becoming increasingly interested in shorting them, looking for a give-back of some (or all) of the gains of the past week.

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

ApproachingTheBell

09/05/06 3:25 PM EST

Something unusual that's sticking out to me today is that despite a fairly good run higher by the major indexes, we're not seeing much in terms of prolonged positive TICK readings.

If you look at something like our cumulative TICK indicator for either the NYSE or Nasdaq, you'll see that so far today it has moved lower throughout the day. When we see a major index like the S&P moving to its highest point in a couple of months, you'd expect to see the TICK become ever-more overbought.

These kinds of divergences are rare. Over the past few months, I can only find two other pronounced cases. One was a positive divergence at the low in mid-July. The other was a divergence like we're seeing now as the S&P rallied into August 17th and the cumulative TICK hit an overbought level. Then as the S&P continued to rise on the 18th, the TICKs backed off and formed a divergence like we're seeing today. I continue to favor looking for a give-back of the gains seen over the past week in the coming days.

LunchtimeLull

09/05/06 12:25 PM EST

A couple of times last week, I noted that we should see at least a very short-term decline based on either the price pattern that had set up, or the condition of our intraday guides. I prefaced those comments with the caveat that we would likely see an unusual trading environment based on light trading turnover and positive seasonality heading into the holiday break.

So while looking for short-term weakness proved to be generally wrong, I wasn't particularly worried about it because of the extenuating circumstances. We don't have those today, yet we continue to see rising prices, and I am becoming increasingly uncomfortable. We have what I believe to be compelling evidence that has suggested - even if we're in the midst of a new upleg of a roaring bull market - that we should see at least a short-term reprieve from the buying pressure.

When prices don't do what they "should", we have to pay attention. It could be either one of two things: 1) this is a temporary spike that will fail in the coming days, or 2) I'm simply flat-out wrong in looking for a pullback. I've been spending the past couple of hours trying to determine which of those scenarios is most likely, and I'm still not sure. What we're seeing today could just be some beginning-of-month seasonal flows, but that's not a consistent phenomenon in September (particularly when August was up for the month).

New highs for the S&P and Dow are sitting just above, and the NDX has its June high and (downward-sloping) 200-day moving average, so there are some obvious pivot points close by that both longs and shorts can use to determine at what point they're going to cry uncle. For now, I'm gong to stick with my thought that these gains will be given back, and I will use those levels mentioned in the previous sentence as places where, if they are overtaken and held, I'll have to admit defeat for this move. On a short-term basis, I will become increasingly interested in shorting the indices should they approach those previous highs over the next day or so.

MidMorningOutlook

09/05/06 10:25 AM EST

Good Tuesday morning...We begin the unofficial start to "real" trading with a mixed start across the major indices and sectors.

The implied volatility measures are jumping higher this morning in spite of muted moves in the price indices. We often see a rise in implied volatilities on Mondays, and perhaps it is exacerbated today because of the holiday, but it seems unusual to see the VIX jump 7% with the S&P 500 only down 0.5 points. Not sure what (if anything) to read into it yet, though.

We're also seeing relatively high TRIN readings, particularly on the Nasdaq. This shows that a large chunk of volume is flowing into issues that are trading negative on the day, which is normally negative for the NDX as well, but it is to a point that could be considered extreme. We saw something like this last Thursday, where we got very high TRIN readings despite a market that was down only slightly.

As I noted late last week and over the weekend, I'm not really interested in chasing any upside strength. The odds of a reversal - potentially a rather nasty one - seems high, and now we no longer have the "artificial" supports that we saw last week. I'm expecting to see a good deal of volatility this week, both ways, as traders feel their way back after summer vacations, which should present us with a good opportunity or two.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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