Snapshot Notes - September 13, 2006

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WEDNESDAY, SEPTEMBER 13, 2006

PostCloseSummary

09/13/06 5:00 PM EST

We've been subjected to a lot of press concerning the seasonally poor month of September, historically the worst one of the twelve. Yet despite the dire warnings, prices continue to rise...and expectations of a bad month are beginning to abate.

One indication of that is the CBOE implied volatility indicator, or VIX. It fell to a new three-month low today, something that is quite rare to see in September. I thought it would be interesting to loosen the standards a bit and look at history, so I took a look at any time since 1990 that the VIX hit at least a 30-day low in September, then where it was 30 trading days later.

The results were telling. I detailed them earlier, but want to touch on them again. We saw this happen during seven years, which encompassed a total of 14 days. 30 days later, the VIX was higher 86% of the time, but more remarkably, on average it declined a maximum of only -7% compared to a maximum rise of +46%.

Every single time, it rose at least 15% sometime in the next 30 days, while only twice did it fall more than 10%. If we apply that to our current situation, then it would mean that it would be highly unlikely that we'll see the VIX fall close to 10 anytime between now and the end of October, but it's quite likely we'll see a reading over 13 at least - and over 16 if it holds close to average. And just to be clear, increasing volatility almost always coincides with falling stock prices.

As far as the short-term, today didn't really change anything in terms of our short-term guides, or my outlook. I think this general area is as good as any to expect a stall of the rally in the NDX, what with the layers of various kinds of potential resistance just above, but I'll have to re-evaluate if we manage to rally above 1630ish and hold.

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

ApproachingTheBell

09/13/06 3:25 PM EST

Nothing really has changed here as the day wears on. The Dow and S&P have seen a small spike higher, while the NDX, which is where my focus is for now, has just failed after testing its early-morning high for the second time.

Our short-term guides are still super-stretched, the same resistance levels are still layered above in the NDX, and I still expect to see a pullback in the coming days rather than a sustained move over 1630ish in the NDX.

Something interesting I was just looking at...if you bought the VIX any time it made a 30-day low in September, and held it for 30 days, what happened next? Well, it's happened in seven different years, spanning a total of 14 days (not including today). 30 days later, the VIX was higher 12 of those times, by an average of +17%. The average maximum loss was -7%, compared to an average maximum gain of...get this...+47%. In other words, beware low-volatility readings in September.

LunchtimeLull

09/13/06 12:25 PM EST

The failure of the morning's initial rally to hold apparently didn't deter too many traders, as we've bounced right back up to the day's highs in each of the major indexes.

Our short-term guides are still very stretched, no surprises there, and I continue to think that looking out over the next several days, it makes more sense to expect weakness than sustained strength. I've been told by people who should know that some very large options traders have been adjusting positions this week, which has grossly magnified the moves we're seeing. I don't have any direct knowledge of this, but it does seem to fit with how prices have been acting.

Regardless, I'm still using that general 1630ish area on the NDX as a potential ceiling for this move, with a move towards or slightly above it likely to fail going into next week.

MidMorningOutlook

09/13/06 10:25 AM EST

Good Wednesday morning...We start this morning with another rally attempt, but as I noted yesterday afternoon, we're now getting very stretched in the short-term.

The cumulative TICK on the Nasdaq has been pushed all the way up over +2600, the highest reading since June. This is a very high level - over the past four years, fewer than 1% of all 1/2 hourly periods have matched or exceeded it.

So far this year, this level of overbought has been reached six distinct times, encompassing a total of 13 half-hourly periods. One day later, the NDX was positive 39% of the time with an average return of -0.7%; three days later, it was positive 15% of the time with a -1.7% avg return; and five days later, it was also positive 15% of the time with a -2.1% return.

I don't want to harp on one indicator too much, especially very short-term ones, but this one has been pretty consistent at preceding weakness, especially when we get such a high reading when not immediately coming out of an intermediate-term market low. The NDX bottomed almost two months ago, so that's certainly not the case now.

I noted yesterday that I would be using the general 1630ish area as a pivot on the NDX. There's nothing magical about that level, but I think it's an interesting combination of equaling the peaks in Dec 2004, Aug 2005 and Jun 2006 (and the lows from January, February and March of this year - the breakdown level), the 61.8% Fibonacci retracement of the April high to July low, and the declining 200-day moving average.

Given that cluster of potential resistance points, and the extremely overbought nature of our short-term guides, this seems like a pretty good place to expect prices to stall out, and that's what I'm looking for, particularly given the upcoming negative seasonality after expiration day.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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