Snapshot Notes - September 25, 2006

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MONDAY, SEPTEMBER 25, 2006

PostCloseSummary

09/25/06 5:00 PM EST

On Friday afternoon, we were seeing a classic bullish setup with the major indices being oversold on support. "Oversold" and "support" are obviously open to interpretation, but at the time we were seeing our STEM.MR models for the S&P and NDX dip below their lower trading bands while the S&P and NDX themselves were holding above the prior week's lows.

The last time this happened, we got a nearly-immediate 20-point jump in the S&P, but this signal took a bit longer to get going - long enough that if we broke below support at 1310 in the S&P and 1605ish in the NDX, we'd have to conclude that the priorities of market participants were changing and pressing short positions would become more feasible.

But after a brief dip this morning after a gap up open, the indices rocked higher once again, and left us in the continued position of seeing nothing wrong with the technical setup. Until we cannot rally off of short-term oversold conditions, there is scant evidence that we're about to crumble. Shorts will continue to try to press against the indices as long as they're not setting new highs, which are *this close* in the S&P and DJIA. If we take out those highs soon, we should see at least a very short-term spike as buy stop orders are executed.

So we're at another point which has the potential to exacerbate intraday volatility - we could see quick drops as short press rally attempts towards recent highs, and quick spikes higher if those highs are taken out and there is a bevy of buy-stops resting above. The 1310 (S&P) and 1605ish) areas look like they're going to become even more of a focus the next time we cycle towards there, but until they're broken, shorts have a tough row to hoe.

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

ApproachingTheBell

09/25/06 3:25 PM EST

The major indices have been trending solidly higher from the morning lows, and continue to demonstrate exactly the type of behavior they should during a healthy uptrend.

We've now rallied about 20 S&P points off the oversold STEM.MR model reading I went over on Friday and this morning, and while this move took a little longer to get going, get going it did and another new high is the result. It's extremely difficult to fade this kind of activity, and I don't see many good reasons to do so.

Our short-term guides are cycling back towards overbought, but have not quite made it and it'd likely take another few hours of consistent buying pressure to get them there. About the only really extreme reading I see now is the TRIN on the Nasdaq, which has declined to 0.30. This shows very narrow buying pressure, and has often preceded at least a temporary pause in the NDX, but it's a solitary reading and with the NDX hitting new highs for this move, it's not enough to be actionable.

LunchtimeLull

09/25/06 12:25 PM EST

In the previous note I mentioned that we should see buying interest come in again given that we were still somewhat oversold and the opening gap had already been filled. Soon after the note, we got a quick spike up in the indices to bring us close to unchanged on the day.

Our short-term guides are now mostly back to neutral, and given the back-and-forth price action, it's hard to decipher an edge here. Longs have the benefit of the doubt simply because prices have done nothing wrong yet by rallying off of short-term oversold conditions, but that would change if we roll over today and violate 1310 on the S&P and 1605-1610ish on the NDX.

MidMorningOutlook

09/25/06 10:25 AM EST

Good Monday morning...A few weeks ago, I noted the position of small speculators in the stock index futures market, and how they had reached one of their lowest net long positions in years - a bullish factor for the market in general, which so far has proved to be the case once again.

These traders typically get longer and longer as the market rallies and they try to take advantage of further price gains. That has not happened this time around, however. Despite the positive performance in the major averages this month, small specs have continued to reduce their net long exposure, and now they're carrying less than $13 billion in long positions for the first time since March 2003.

You can see from the chart on the site that the stochastic we track this data with is at 0%, which is the most bullish possible for the market. Historically, the returns going forward after such behavior is very good, with the S&P being positive three months later 83% of the time with a +3.6% average return. Over the past 20 years, there have only been five weeks when the stochastic hit 0% while the S&P was within 3% of a 52-week high, and going forward the three-month return was +5.8% with four of the five being positive.

As for the short-term, I mentioned on Friday that our STEM.MR models for the S&P and NDX had dipped below their oversold trading bands, something that had resulted in nearly-immediate rallies over the past few months. That again proved to be the case, as equities found their footing soon thereafter. We got a rather sizable gap up this morning, and as per usual for Monday morning gaps, this one already faded enough to close on the major indices.

It'll take more time for our short-term guides to fully move out of their oversold conditions, so we *should* continue to see buying pressure come in here, especially now that the gaps have already been closed for all practical purposes. If we instead see the indices roll over (particularly if we lose 1310 on the cash S&P and 1605-1610ish on the NDX), then we'll have better cause to concentrate on short positions, as it'll be the first hint that traders don't have the desire to commit funds in spite of there being "value" in the market.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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