Snapshot Notes - October 3, 2006

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TUESDAY, OCTOBER 3, 2006

PostCloseSummary

10/03/06 5:00 PM EST

We began this morning with an important test of buyers' resolve - the S&P 500 was sitting right at its breakout point at 1327, and the Nasdaq 100 was as short-term oversold as it had been at any other time in the past few months (according to our short-term guides, anyway).

The indices passed the test - again - and once more proved that it has not paid to bet aggressively on the short side until we see some kind of confirmation that buyers aren't interested in buying every little dip. The NDX jumped over 20 points from the intraday low, and that 1327 print on the S&P was the low of the day, so for now anyway those looking for some evidence of lower prices to come remain frustrated.

The Dow finally ticked at a new high intraday, though it was unconfirmed by new yearly highs in the other major indexes. On a very short-term time frame, this could prove to be a selling point among traders if the Dow begins to fail - watching for like moves among the major tradeable indices is a popular form of analysis and a failure could very well prove to be self-fulfilling.

For the time being, I continue to sit mostly on the sidelines. I don't like the risk/reward of the long side when looking out over the next couple of weeks, and as has been the case for the past week, shorts are too risky for my taste until we see the S&P back under its old high at 1327.

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

ApproachingTheBell

10/03/06 3:25 PM EST

The rally off the morning lows has pushed our short-term guides back into neutral territory, from the relatively severe oversold condition they had entered earlier this morning (on the NDX).

This afternoon we did indeed see the Dow tick at a new all-time high, something that (so far) has not been met with new yearly highs in the other major equity indexes. We've been trapped in an extremely tight range after the morning push, and most short-term traders (me included) will likely be taking their cue from which way we break.

If we break to new highs in the S&P, I don't think it will be sustained when looking out over the next couple of weeks, but as I've been noting for the past week, I'm not inclined to try and press any short bets unless we get some actual weakness in price, which I'm considering to be a trade back below 1327.

LunchtimeLull

10/03/06 12:25 PM EST

In the earlier update this morning, I mentioned that the STEM.MR model for the Nasdaq had hit one of its most oversold levels of the past few months - something that lead to lows in the NDX almost without fail. That record seems to be intact, as the NDX has already jumped 20 points from the morning's lows.

So once again we're seeing equities in general do what they should be doing. The S&P 500 tested and held its breakout level at 1327, and the NDX bounced as it should from a severe short-term oversold condition. We continue to see nothing in the way of confirmation that this is anything other than a healthy uptrend.

We seem to be destined to have the DJIA tick at a new all-time high, which now is just a few points above. It'll be interesting, of course, to see traders' reactions to the event should it happen, but by now it's a little anti-climactic. About the best hope for those looking for a decline here is to see the Dow finally tick at a new high, with all the associated celebrations in the mainstream financial media, but at the same time have none of the other major equity indices also hit a new high. Should we begin to falter after that, traders will point to the non-confirmations and it could feed on itself. But that's putting the cart before the horse...

MidMorningOutlook

10/03/06 10:25 AM EST

Good Tuesday morning...The lowrisk.com sentiment survey released yesterday reported a slight uptick in bullishness, but more notably another drop in neutral responses. The poll closed Sunday evening, and only 8% of respondents didn't have a firm opinion on market direction.

This is one of the lowest levels in years, and it confirms what we're seeing in a few of the other surveys as well - there are a bunch of folks who are bullish, a bunch who are bearish, and not many in the middle. I haven't found that this kind of strong divided opinion means much directionally, but it does seems to precede large, sustained moves one way or the other. Considering the low VIX readings and October's notoriety for being a volatile month, this is another datapoint suggesting that notoriety is likely to be confirmed again this year.

As for the short-term, the additional weakness this morning took the S&P to precisely test its breakout level at 1327, which so far has held. The NDX is faring far worse, in keeping with the SPX / NDX divergence we saw last week. Our short-term guides for the NDX are now about as oversold as they've been over the past couple of months (the STEM.MR model for the Nasdaq is now at 52%), and those other times have coincided with lows in the NDX almost without fail, so again this will be a good test of buyers' resolve here.

If the NDX continues to fall in spite of these short-term oversold readings, and the S&P loses that 1327 level, we'll have ample evidence of a change in market character that should lead to lower prices over the next couple of weeks.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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