Snapshot Notes - October 6, 2006

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FRIDAY, OCTOBER 6, 2006

PostCloseSummary

10/06/06 5:00 PM EST

When we see a momentum high, the type of trading that usually follows is choppy with little directional bias.

It would be hard to argue that we didn't see a momentum high on Wednesday as the STEM.MR model reached a record overbought reading. Those are not good sell signals in the context of a strong uptrend, but they are effective at highlighting peaks in momentum, and it's difficult for stocks to maintain further pushes higher immediately afterwards.

I've been interested in trying to buy, for a short-term trade, the first approach back towards 1340 on the S&P. We got fairly close this morning, and perhaps that was the test, but I doubt it. The ideal situation would be another round of mild selling pressure on Monday which pushes the indexes closer to their breakout levels and our intraday guides towards oversold territory, and it's what I'll be looking for early next week.

Towards the close today, the CFTC released the latest Commitments of Traders data. In it, we see that commercial traders (aka the "smart money") increased their net short position to $24.7 billion - an increase of over $15 billion since early September. Their current position is the heaviest bet against a further rally since March of this year, and is extreme enough to be notable.

On the positive side, AMG Data reported that investors have still not begun shoveling money into equity mutual funds (excluding exchange-traded funds). Most prior peaks have come after a number of weeks of large positive inflow to funds, and we're just not seeing that now (on a side note, we're now posting the AMG data weekly to the site).

So we have two new intermediate-term developments, one bullish and one bearish, which is par for the course lately. It's impossible to derive a consensus opinion from the various measures we follow, which I suppose is a reflection of the relatively poor breadth we've seen during this rally, but it still suggests that there is little reason to expect an imminent reversal.

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

ApproachingTheBell

10/06/06 3:25 PM EST

We haven't really moved much all day, as the first test of the morning lows held, propelling us to the highs of the days, which so far proved to be temporary as we've fallen right back into the range - fairly typical trading activity after a momentum high like we saw on Wednesday.

Along with the market, our intraday indicators haven't really moved much and remain neutral. I still like the idea of buying the first real test of 1340 on the S&P (whether this morning qualifies or not is debatable), and that's about it on my radar for index trades.

LunchtimeLull

10/06/06 12:25 PM EST

We continue to see weakness across the board, though so far it's not generating any extremes in the short-term indicators that I follow. I'm still interested in a potential buy if/when the S&P slides down to test that 1340 level, preferably accompanied by a few extremes in our intraday indicators, but until then I don't see much of interest either way.

MidMorningOutlook

10/06/06 10:25 AM EST

Good Friday morning...We start the final day of the week with a gap down open and trade below yesterday's low, as apparently some didn't like what they saw in the jobs report.

Such activity coming after the S&P 500 hit a new yearly high yesterday seems as though it should augur a correction, and historically that has been the case. We've seen similar circumstances a little over 50 times in the past decade, and about 60% of the time the S&P 500 exchange-traded fund, SPY, closed lower a week later. Over the past couple of years, we've had it happen 5 times, and after a week it was lower 4 of the 5 by an average of about -0.7%.

Given the tendency I noted yesterday for the meat of October to suffer consistently poor returns (especially if September bucked its seasonal trend and was positive), yesterday's relatively narrow-range day, and today's gap down and trade under yesterday's low, I'm sticking with my outlook that the momentum for this move has peaked.

I've noted that I would possibly be interested in a quick long-side trade if we saw the S&P 500 gravitate back towards its breakout level of 1340, as those who missed all the hoopla see a spot to get in. Ideally we will see a bit more pressure as today progresses, and our intraday guides work toward oversold readings. The first move towards that level should bring in at least a temporary buying binge, and that's what's foremost on my radar for today.

Note that some futures and options contracts will be closing early today, primarily for fixed income contracts, and that may slow equity trading volume when we get past the lunch hour. Those kinds of early closes in bonds tend to result in a positive drift to equities, but I haven't found it strong enough to be tradeable.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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