Snapshot Notes - September 21, 2006

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THURSDAY, SEPTEMBER 21, 2006

PostCloseSummary

09/21/06 5:00 PM EST

I've been looking for a more meaningful pullback for over a week now, yet the major indices continue to hang in there. They haven't run away to the upside, but neither have they participated in much of a correction.

Today we got early strength (again), but it faded by the close, giving us a "bearish" outside day in most of the major equity averages. According to technical analysis lore, this is supposed to be a bad thing going forward. Earlier today, I went over the stats for this setup in the NDX, and it has not born out the bearish argument, with returns going forward that were in line with any random time.

That's not to say there is no reason to expect further selling pressure. Most of the concerns I'd been highlighting take more time to work themselves out, such as the consistent post-Fed reversals we're seeing once again. Our short-term guides had become fairly overbought by yesterday's close, but today's selling has pushed them into oversold (or very close to it) for the second time this week.

The last time they became oversold, equities turned tail immediately and headed to new highs - precisely as should happen in a healthy uptrend. So this latest instance will be a good test of the willingness of buyers to step in again - if we cannot bounce very soon, then we will have some of the first indications that we're going through a change in character where traders will be more aggressive in selling rallies. Until then, though, the uptrend is innocent until proven guilty.

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

ApproachingTheBell

09/21/06 3:25 PM EST

The major equity averages have continued to weaken as the day has progressed, and our intraday guides are very close to giving oversold signals again.

The NDX in particular has scored a bearish outside day, meaning that in comparison to yesterday, it has formed a higher high, a lower low and potentially a lower close. According to the technical literature, this should take on added significance since today's high was also the highest we've seen for several months.

I tested this pattern on the NDX over its 20-year history, and the results don't really support the theory that this is a bearish omen going forward. I found 49 occurrences, and for all time frames up to a month later, the NDX showed an average return and percentage of time positive about in line with any other random time. The "bearish outside day" didn't lead to anything consistent going forward, and the results didn't change when also stipulated that the NDX had rallied several percent leading into the day, or if it closed below yesterday's low. It looks awful on a chart, but hasn't been reliable historically.

But of course those are just stats taken in a vacuum, and while they can be very helpful at times, we have to judge each situation on its own merit. Given everything that has been leading up to today (the overbought short-term conditions, post-Fed reversal, etc.), I think weakness is still more likely to win out over strength going forward and today's action helps to reinforce that outlook. The next big test will be over the next few hours as our shortest-term guides become oversold - if we don't manage much of a bounce off of that, then it will be time to be more aggressive in looking for additional weakness.

LunchtimeLull

09/21/06 12:25 PM EST

The Philadelphia Fed survey came out at noon, quite a bit weaker than expected. We got a quick downdraft across the board in the major indices, but the selling pressure stabilized quickly.

Nothing is fazing buyers, it seems. Even with the semis down over 1%, the NDX is still positive on the day. It's been over a year since we've seen that kind of divergence, and it's only happened 36 times in the past 7 years. There wasn't much about the other occurrences that were consistent going forward, other than the following day the NDX was negative about 60% of the time by an average of -0.6%.

Other than that, nothing much that's notable is popping up on my radar.

MidMorningOutlook

09/21/06 10:15 AM EST

Good Thursday morning...Pretty muted start to the day so far, which isn't uncommon after a day like yesterday.

The AAII sentiment survey came out this morning with a slight uptick in bullish opinion, and the 4-week average of the bull ratio has now climbed to nearly the exact middle of its range. I do find it interesting over the past few years that the peak in bullishness was reached in January 2004, and each subsequent move to new highs in the broader market has bought a lower peak in bullishness.

Over the 20-year history of the survey, we don't have very many multi-year bull markets to compare this to, but still the only real precedent occurred in the late 1980's. After the 1987 crash, equities rebounded strongly, and the peak in bullish opinion occurred in the spring of 1988. After that, most new yearly highs in the S&P 500 were met with lower and lower peak in the AAII bull ratio, finally culminating in the mini-bear market of 1990. Not sure we can read anything into it, but it's a curiosity for sure.

As for the short-term, I don't see anything today that has me wanting to change my outlook. I don't think now is a particularly good time to buy or short, though I do continue to expect more weakness than strength in the coming days as the overbought condition and "Fed reversal" get worked out.

As an aside, these mid-morning notes are going to be posted a bit earlier going forward, to 10:15am from 10:25am EST.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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