Snapshot Notes - September 18, 2006

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MONDAY, SEPTEMBER 18, 2006

PostCloseSummary

09/18/06 5:00 PM EST

Towards the end of August, there were some very good reasons to expect a short-term pullback in prices, yet they continued to rise longer than expected, to the point where it was prudent to begin questioning if expecting a pullback was the right thing to do.

Soon afterwards, the pullback came in swift fashion. We're faced with a somewhat similar setup now, in that there have been some intriguingly consistent signposts pointing to weakness ahead, particularly after option expiration was out of the way.

Despite those signs, prices for the major equity indices held up, and did so again today. The Mondays following option expirations tend to be some of the weakest days of the year, but even that didn't help out the shorts too much today. We're once again to the point where it's probably a good idea to question whether continually looking for at least a short-term pullback is a prudent thing to do.

I noted earlier that I'd like to see a move under 1315ish in the S&P 500 and 1620ish in the NDX to get at least a little confirmation that a bigger pullback may be at hand. If we just hang around for a bit then head to new highs for the week, however, that pullback scenario losses a lot of its luster.

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

ApproachingTheBell

09/18/06 3:25 PM EST

We're finally seeing a little weakness this afternoon, now we need to see if it'll stick. The Monday following option expiration has historically accounted for most of the losses for the week, so if this is all the selling pressure we're going to get, shorts might be in for another tough week.

Our intraday guides aren't being much of a help here. I noted on Friday that several of them were actually giving oversold signals, but the lift this morning alleviated that, and most are firmly neutral at this point.

I'm still looking for more weakness than strength going forward, and I'd like to see a move below 1315ish in the S&P 500 and 1620ish in the NDX as the first signs that this pullback idea is going to play out. If we don't get that relatively quickly, and instead stay in the range of the past two days for a bit, then go on to fresh highs, I'll have to admit defeat for this idea.

LunchtimeLull

09/18/06 12:25 PM EST

Semiconductor stocks continue to move higher, and it seems to be dragging everything else along with it. There's no change on this end - still waiting for a pullback that appears to be a fruitless endeavor.

I've been asked several times what I meant earlier when I noted I would have to back off on pressing short positions. What I meant was that there were (and are) some very valid reasons to expect a correction in the short-term, especially in the NDX. Overbought conditions in a downtrending market are high-probability setups for short positions. Especially in the latter half of September.

"Overbought" and "downtrend" are open to interpretation, and last week I laid out the parameters I was using to define those. To take advantage of what I thought was most likely to happen, I bought Oct 40 puts in QQQQ late last week, and have been trading in and out from the short side in addition to having those puts.

The options have been bleeding since my purchase, as options are wont to do if you don't get the timing exactly right, which obviously I have not. However, they are a relatively small part of my overall portfolio and I intend to hold them until expiration, even if it appears they may expire worthless - kind of an insurance policy just in case all the bad things I've been noting happen to come to fruition later than I thought they would.

In the meantime, though, if we don't start to see the expected weakness, then I will likely back off trying to short the intraday pushes higher we've been seeing that have not been leading to any meaningful pullbacks. I've missed a good deal of upside, and don't want to continually swim upstream. The NDX was in a defined downtrend, under substantial resistance, but it has been overcoming that with ease, thus making the trade setup less valid.

MidMorningOutlook

09/18/06 10:25 AM EST

Good Monday morning...We start this post-expiration week with moderate gains, as tech is hanging tough on some analyst upgrades (why anyone pays attention to these except as a contrary indicator is beyond me), and a buyout. That buyout of Freescale is helping propel semi stocks higher this morning, no doubt the main reason the NDX is green.

I've written before that I use very, very few technical indicators, but one that I do use is a 3-period RSI (Relative Strength Index). Yesterday that measure on the daily Nasdaq 100 rose to an extremely overbought level over 90, while at the same time the 200-day average of the NDX is still falling. Buying after this combination over the past decade and holding for three days would have netted you only 3 winning trades out of 15 attempts, with an average return of -2.1%. The average maximum gain during those three days was +0.9% compared to an average maximum drawdown of -3.3%.

We're probably all tired of hearing about seasonality, so I'm not going to write anything about it. Well, except for the fact that over the past 55 years, the first two weeks of trading in September lost a total of 105 points in the S&P 500. But the last two weeks lost a total of 292 points.

I've been (wrongly) looking for a pullback in the short-term, particularly in the NDX, and option expirations have often proved to mark at least short-term turning points. The NDX did surprise me by being able to climb above 1630ish and hold, and this morning's pop in semi stocks is making the short side even more difficult - like we needed that.

If we don't begin to see some sustained weakness soon - like today - I'm going to have to back off on pressing shorts. I don't have any desire to buy into a market like this, but getting stuck in a trap of continually betting on a pullback is not something I want to do, and this is beginning to really test my tolerance level.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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