Snapshot Notes - September 19, 2006

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TUESDAY, SEPTEMBER 19, 2006

PostCloseSummary

09/19/06 5:00 PM EST

Despite an earnings warning from MXIM and some weakness in semiconductor shares, through mid-morning today it looked like it was going to be a fairly typical pre-Fed day with a modest intraday range and no real intraday bias.

That changed when YHOO unofficially announced it would be reporting disappointing earnings, and immediately that stock and most others in the sector took a big blow across the chin. By mid-afternoon, however, traders began to snap up apparent bargains that had been caught in YHOOs draft and that allowed the major averages to stem their losses going into the close.

Our STEM.MR model had dipped outside of its oversold trading band this afternoon for the first time since the low on September 7th, something that's been a reliable short-term buy signal. Right on cue the S&P began to bounce, so we don't have much evidence yet that we're undergoing a change in character - short-term oversold conditions are still bringing in buyers.

The day of Fed rate decisions tends to see muted price action leading up to the early afternoon with a slight upward bias, then wild swings in the half-hour after the statement is released, then something of a trend into the close. Whatever the reaction, we often see a reversal of the post-Fed move in the day or two following, particularly if the initial move is large. Just as an example, whenever the S&P dropped by 1% or more the day of a Fed meeting, the following day closed in positive territory 86% of the time.

I'm not sure there'll be a lot to do tomorrow morning other than wait for the decision and the reaction soon afterwards. Extreme moves in either direction can probably be faded by short-term traders, but the volatility is often extreme and risk is high.

Based on the relatively severe selling pressure we saw this morning, the initial reaction back up should bring in some selling pressure, so I do expect a retest of this morning's lows at some point. The averages have rallied right up to the breakdown point below the past two days' lows, normally a good spot to expect the weakness to resume. After the close, ORCL released better-than-expected results and the futures are reacting well to it, so we'll have to see if that holds up when regular trading resumes.

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

ApproachingTheBell

09/19/06 3:25 PM EST

Traders are making a valiant attempt to snap up "bargains" in shares that got caught in YHOO's downdraft this morning, and that has allowed the broader averages to stem their losses a bit.

I don't think the Fed meeting tomorrow is going to be anything other than a non-event, but it's still pretty rare to see equities make a big move immediately leading up to the early-afternoon decision and statement. There has usually been a slight upward drift leading up to the decision itself, so that'll be something to watch for.

Either way, the move we see after the decision is often reversed the following day, particularly if it's a large one. We'll have to wait to see how traders react following the release to see if there's a chance to fade an extreme move.

Our intraday guides ventured towards oversold territory earlier this afternoon, particularly on the S&P. This is the first time the STEM.MR model has ventured beyond its "oversold" trading band since the low on September 7th, and the S&P has bounced right on cue, so there's no real evidence yet that we're seeing a change in character from what we've seen the past few weeks. In order to be more confidence that at least a short-term downtrend is beginning, we should see these measures become oversold and stay that way while the market continues to decline.

I'll be most curious to see how this bounce is going to get treated over the next day. The Fed meeting throws a wrench into "natural" market movements, but I'm expecting to see this first reaction back up bring in a round of selling pressure that should at least test this morning's low.

LunchtimeLull

09/19/06 12:25 PM EST

Seemingly coming out of the blue, internet stalwart YHOO! came out with an "unofficial" earnings warning, which has taken that stock and the entire sector down swiftly and severely.

Now two of the highest-beta tech sectors, semis and internets, are down several percent and it has been having an effect on the broader market, finally bringing home some of the issues we've been going over the past few days.

I was not looking for any earnings warnings this early, and I don't think too many others were either. Based on the large and consistent negative TICKs we've been seeing over the past half-hour - more than we've seen in many weeks - it looks like we could be undergoing at least a minor shift in sentiment here where we'll see traders more interested in selling rally attempts. I'm sticking with my outlook of more weakness ahead.

MidMorningOutlook

09/19/06 10:25 AM EST

Good Tuesday morning...We begin this pre-Fed day with some mild selling pressure after the initial jerk higher from the PPI report.

There has been a definite tendency over the past few years to see tight intraday ranges on the day before the Fed announces a rate decision. If we look at the past 20 meetings, the intraday range in the S&P 500 on the day prior to the meeting was less than 20 points all 20 times; less than 10 points 14 times; and less than 7 points 8 times. There hasn't really been any directional bias to these days lately.

So it seems as though we may be unreasonable to expect a large intraday move today as traders wait for what the Fed has to say tomorrow, though there doesn't seem to be much doubt about what the outcome of this meeting will be (especially after today's benign PPI report), so more than most others over the past year, this meeting will likely be a non-event.

I'm not seeing anything so far today or from last night's figures that has me wanting to change my outlook, which continues to be that of a short-term pullback. I've been unpleasantly surprised by the recent strength, particularly yesterday, and will be less and less interested in shorting additional moves to new highs.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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