Snapshot Notes - September 26, 2006

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TUESDAY, SEPTEMBER 26, 2006

PostCloseSummary

09/26/06 5:00 PM EST

I'm not a big conspiracy theorist. I think the Fed stays out of the equity and futures markets except in times of extreme duress, and I don't think the broader equity indices exhibit consistent signs of quarter-end "window dressing" by mutual and hedge funds.

But I gotta tell ya, today's intraday action felt very forced - like many stocks were being pulled up by a string. I don't know what the reason was, or even if I'm just imagining it, but after watching most every tick for years on end, you develop a feel for what's normal and what's not, and today seemed firmly in the "what's not".

Whatever the reason, there remains scant evidence that it's about to turn tail. Our short-term guides, which have been pretty handy at highlighting the short-term turning points, are modestly overbought (except on the NDX), but given the behavior of the price action, that in itself is not enough to expect an imminent reversal or even necessarily a pause. This has the feel like we're going to see an "air pocket" hit out of the clear blue, but again that's just my feel and is unsupported by anything concrete.

Barring a spike in our short-term indicators into nosebleed overbought territory, the only thing that interests me on the short side would be a quick reversal under the recent highs (1327 in the S&P) that traps those trying to play the breakout here and which would likely result in a swift move lower. Trying to go long here feels like an exercise in "plug your nose, shut your eyes and buy", ala 1995, but that's not my forte and unfortunately it results in underperformance in strong trends. So I'm trying to play things very close to the vest, earn 5%+ interest on my cash balances, and wait for the next high-probability setup.

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

ApproachingTheBell

09/26/06 3:25 PM EST

It feels like the stock indices are being pulled up by a string, with odd, spiky intraday movements. It could be "window dressing" by funds, but whatever the reason there remains little to point to that suggests an imminent end.

Our intraday guides remain modestly overbought, but with the indices hitting new highs for this move (or very close to it), that's not enough to expect a breakdown or even a pause. I noted earlier that in the unlikely scenario of an ugly reversal back under the recent highs, I might consider a short trade, but other than that I don't see much that's intriguing in terms of the broader market.

This has been a very unusual and uniquely challenging month, and it looks like it's going to stay that way right to the end. I've been playing it very close to the vest, and I don't see that changing until another good setup comes along.

LunchtimeLull

09/26/06 12:25 PM EST

With semiconductors consistently slipping lower this morning, the NDX failed to stay above its breakout from last week's highs, and the S&P is in danger of doing the same as it tickles that 1327 level.

A failure to hold new highs and subsequent nasty reversal is about the only case I could make for the short side here, and with our intraday guides modestly overbought, I suppose that's a possibility. I'm not trading it that way yet, but if we really see the indices slip here, then I might look to short a weak afternoon bounce as long as the S&P remained below 1327. It doesn't seem like a real likely scenario, but that's about the only potential setup I see that holds any interest for me at this point.

MidMorningOutlook

09/26/06 10:25 AM EST

Good Tuesday morning...On the site globaltechstocks.com, Adam Warner noted a study regarding VIX levels and subsequent performance of small-caps versus large-caps. According to the study, when the VIX was extremely low (defined as being 10% - 20% below its 75-day average), then small-cap stocks should out-perform.

As of yesterday's close, the VIX was about 17% below its average, so I checked out the returns of the Russell 2000 small-cap index versus the Dow Jones Industrial Average from 2003 - present using the above parameters. While the initial study used the S&P 500 as the large-cap proxy and studied very short-term returns, I didn't find much evidence that this was effective for a trading strategy under 5 days.

I did find, however, than when the VIX dropped more than 10% below its 75-day average, then over the next two weeks the Russell 2000 did tend to outdo the DJIA 63% of the time by an average of +0.7%.

On the other hand, when the VIX rose more than 10% above its 75-day average, then there wasn't much of a bias. But when it rose to more than 30% above its average, then the DJIA outperformed 63% of the time. In both situations, there was some very short-term movement the other way before it went in the trades' favor.

The theory is that in times of uncertainty (high VIX readings), traders will concentrate on "safe" large-cap stocks, and during times of relative calm (low VIX readings), they will focus on higher-risk small-caps. Over the past few years that theory has been tenuous, but generally I suppose one could make the case. Considering that the VIX is now extremely low by this measure, we should expect small-caps to do a bit better. I think there are better ways out there to gauge the likelihood of small-cap vs. large-cap outperformance, but this could be one to add to the pile.

As for the short-term, we begin the day with the major indices breaking out to new highs for this move. Our intraday guides have moved a bit closer to overbought levels, but are not quite there and I have no intention of betting on a pullback unless they either become grossly overbought or we lose the support levels I've been writing about over the past week. I mentioned yesterday that anyone trying to short has a tough row to hoe, and that doesn't look like it's going to change any time soon, unless we get a nasty reversal this morning that scares those recent buyers betting on a breakout.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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