Snapshot Notes - September 6, 2006

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WEDNESDAY, SEPTEMBER 6, 2006

PostCloseSummary

09/06/06 5:00 PM EST

In the first note this morning, I wrote about the previous times the S&P hit a three-month high, then the next morning gapped open below the low of the day on which it made that three-month high (like it did today).

I could only find 6 other instances since 1998, so unfortunately the sample size is too small to be entirely confident of the results, but they were consistent in that a week later the S&P was negative all 6 times. Also notable was that the average drawdown over the next week was nearly five times that of the average gain, suggesting that it's likely that at least a short-term top was put in yesterday.

Today's selling pressure was relatively severe, and it's showing up in several of our shortest-term indicators. This has pushed our short-term STEM.MR models into oversold territory for both the S&P and especially the NDX. The model reading for the NDX is more interesting, as it can be considered extreme on both a relative and absolute scale, and the last few times it has hit this kind of extreme in the past couple of months, the NDX bottomed soon thereafter.

This will be something to watch closely over the next day or two - if tech can't form something of a bounce very soon, then we have a good piece of evidence that we've undergone a change in market character, one where it should pay off better to sell rallies than buy declines.

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

ApproachingTheBell

09/06/06 3:25 PM EST

In the last post, I noted the unusually high TRIN reading on the Nasdaq, which tells us that volume in stocks that are down on the day is swamping volume in issues that are positive. That ratio has become more extreme as the day wears on, and I show a current reading of 3.2.

That's a truly remarkable level that has been exceeded only once in the past two years (on June 8th of this year). Typically, such extremes mark the end of a rather prolonged downtrend, but obviously we haven't had a prolonged downtrend lately. This could also be a "kickoff" reading that highlights a change in market character, which seems more likely given the rally we've seen over the past few weeks. If we don't see a short-term bounce off an extreme like this, then the latter case is the higher probability.

Our short-term STEM.MR models have entered an oversold condition, though as I mentioned last week the one for the S&P is coming out of an extremely tight coil, so it doesn't take much to enter either overbought or oversold. The model for the Nasdaq is more interesting, as the past few times it has reached this kind of extreme, the NDX bottomed shortly thereafter. Again, we'll have to watch this in the next couple of days - if tech can't rally, then it will suggest we've undergone a change in character and are entering at least a short-term downtrend.

In the first note this morning, I mentioned this morning's gap and what it has preceded in the past, and I think that's as good a template as any as far as expecting more weakness over the coming week. Pushing shorts now is becoming a lower-probability affair now that our short-term models have become so stretched, however, so I'm not counting out a temporary snapback before more selling pressure.

LunchtimeLull

09/06/06 12:25 PM EST

Taking a quick look at the components of the Nasdaq 100 index, I see that all of the top-25 volume leaders are trading in negative territory. That kind of behavior is what will skew an indicator like the TRIN, and indeed we're seeing an outsized reading in that indicator this morning.

As of a few minutes ago, the TRIN on the Nasdaq was indicated at around 2.70 according to my quote vendor, which is an extraordinarily high reading. Since the May top, it has reached this kind of extreme on four other days: June 8th, July 5th, July 10th and August 1st. With the exception of July 5th, each of the others preceded a halt in the selling pressure and at least a 20-point rally in the NDX in the next couple of days.

If that severe oversold reading was being accompanied by other extremes in our short-term guides, I would be more inclined to look for a relief rally. But we're barely a half-day into the selling pressure, and for the most part our other indicators aren't suggesting that we're particularly oversold just yet. That will take more time.

That TRIN reading and the spiking implied volatility measures are a bit of evidence that perhaps we've already seen the worst of the damage here, but I don't think any rally from here would go too far before more selling pressure would come in.

MidMorningOutlook

09/06/06 10:25 AM EST

Good Wednesday morning...We started today's trading with a large gap down open, below yesterday's low. The last time the S&P 500 closed at a three-month high then opened the next morning below the previous day's low, was March 17th of this year, after which the index went into a one-month funk.

Since 1998, such a thing has happened six times, and the S&P was able to claw its way back and close positive for the day only one of those times. One week later, it was negative every time by an average of -1.3%. Notably, during that week the average maximum gain from the equivalent of today's open was only +0.6% (the best was +1.1%), while the average maximum loss was -2.8% (the worst was -4.4%). While it would be best to have more instances in recent history, the skewed gain/loss averages suggests that a short-term top has likely been put in.

That would jibe with what we've been going over for the past few days, namely that based on prior price patterns and our short-term guides, that it was likely the gains from the past week would be given back. That's still what I'm looking for, and today's opening gap seemingly supports that view. How to know if I'm wrong? Well, if the S&P rallies more than 1% from today's open during the next few days, then the gap study mentioned above would be called into doubt. Also, I've been using the obvious pivot of the previous high in the S&P (1325ish) as an "uncle" point.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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