Snapshot Notes - September 29, 2006

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FRIDAY, SEPTEMBER 29, 2006

PostCloseSummary

09/29/06 5:00 PM EST

The major indices ended with a whimper today, which is actually what they normally do on the last day of September.

Those kinds of seasonal biases have not worked too well lately, so it might be a good idea to discount whatever bit of weight we put on them. That said, I'll just mention in passing that the start of October has traditionally seen a bit of strength in the first few days.

Combating the possibility of a little strength to start the month, we've seen an extremely tight intraday range in the S&P 500 over the past three days. This has been a consistently bearish omen going forward, in the short-term at least, and I gave the stats earlier for those interested. The last time we saw this kind of tight range was exactly one month ago, after which equities spiked higher to start the month before rolling over.

While I have not been enthused about trying any long-side trades for the past week, I've also been very hesitant to attempt shorts due what seemed like abnormal price action. If it was due to quarter-end sector rotation, then that has already worked through the system and shouldn't be a factor any longer. I still want to see some confirmation of weakness before betting on even more weakness going forward, and I keep migrating back to the previous yearly high in the S&P around 1327. If we lose that to the downside, it seems the probability of further selling pressure will increase.

Have a safe and relaxing weekend and we'll see you next week!

ApproachingTheBell

09/29/06 3:25 PM EST

The S&P 500 has been stuck in an extremely tight range today, coming off two other tight-range days. Very low-volatile situations like this tend to lead to poor returns going forward, at least in the short-term.

The have been 15 days over the past two years (other than today) that the 3-day average true range (a measure of volatility) on the S&P 500 has been less than 7 points, which it will be today if we remain stuck in this range. 3 days after those instances, the S&P was negative 13 times with an average return of -1.1%. We saw this kind of scrunched-up trading to end a month in December 2004, May 2005 and August 2006, with subpar returns going forward in the short-term for each of them.

I'm not sure if we'll see the oft-cited fund flows in the first couple of days of October that seemingly lead to consistent buying pressure. Over the past decade, the first three days in October have shown a positive return 7 of the 10 years, with an average return of +0.7%. That's pretty consistent with prior decades, though as we know these seasonality biases haven't held up too terribly well lately.

If we do see a little kick to start the month, I think the gains will be temporary, and we should see lower prices than the current ones going into mid-October. I've been waiting for some confirmation of weakness before betting too aggressively on the short side, and I think we'll get that opportunity next week.

LunchtimeLull

09/29/06 12:25 PM EST

We've been flopping around in a tight range all morning and the major indices remain mixed from yesterday's close.

Our short-term guides have been creeping towards overbought, particularly on the NDX. The short-term model for that index isn't yet above its overbought trading band, though it is about where it was the last time the NDX took a quick dive beginning on Sept 20th. The price oscillator rose to 63%, which has preceded at least very short-term pauses previously.

With it being the last day of a "major" quarter, we could see some odd action going into the close, but most portfolio adjustments have probably already been made and I don't think that'll be a big factor. Overall, a pretty uneventful day with no changes in outlook or strategy on my end.

MidMorningOutlook

09/29/06 10:25 AM EST

Good Friday morning...We start the final day of the week with a mixed market. Sectors on the move are being lead lower by semiconductors which have been suffering from a bout of manic-depression lately.

An interesting thing about the semis (using SMH as a proxy) is that they've been trading in a loose channel since the July low. Each time it (SMH) moved towards the lower end of the channel, it bounced (making a higher low) and went on to shortly make a new high and extend the channel.

If it rolls over here, then this will be the first time buyers did not have enough "oomph" to push it to a new high and towards the upper end of its range. That's a sign of faltering momentum in an important high-beta sector, and is something to keep on our radars over the next week as a check on the willingness of traders to take on risk.

In the major indices, we've seen a few very spiky moves already this morning as traders jockey for position ahead of and after the economic releases. Historically, the last trading day in September has a mixed-to-poor record. Over the past decade, it has closed in positive territory 4 times with an average return of -0.4%, but we know how the typical September seasonality has played out so far this month...

I continue to think that risk on new long positions here is unacceptably high for me, as it is for shorts. I think we'll see lower prices than these heading into early- to mid-October, but I want to see some evidence of weakness spilling into the major averages before trying to bet on further selling pressure (more particularly a trade in the S&P below its previous high of 1327), and so far it's a no go on that front.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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