Snapshot Notes - October 10, 2006

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TUESDAY, OCTOBER 10, 2006

PostCloseSummary

10/10/06 5:00 PM EST

Over the past four trading days, the S&P 500 has tightened into a very tight wedge, with no more than 10 points of movement between the highest intraday high and lowest intraday low.

Over the past three years, it has shown a similar pattern three other times - the end of December 2004, the middle of June 2005, and the middle of August 2006. Two weeks after each occurrence, the S&P was lower by an average of -1.2%.

I've written before about the generally bearish connotations of very low-volatility conditions like this, but a tendency perhaps even more consistent than pure bearishness is that of initial "fakeout" moves from the coil. We have plenty of evidence of that over the past few months as the S&P consolidated for a few days, then took a quick dive down before rebounding a day or two later and hitting a new high for the move.

So we seem to be setting up for what should prove to be some interesting trading in the S&P over the coming days. Very short-term traders should do OK chasing a breakout on either side of the wedge (1345 to 1355), but the fakeout tendencies of these wedges is high and it's something to watch for once we do break out. Generally these tight coils lead to weakness in the week or two ahead, so an upside breakout would be doubly suspicious.

Adding to the suspicions about the sustainability of another breakout is our Smart Money Confidence, which dipped to 33% as of today's close - the lowest reading since January 4, 2002. The reason for today's move was a spike in the Stock/ Bond Ratio into extreme territory.

Like the Stock/Bond Ratio, the Smart Money Confidence is NOT necessarily a good timing indicator, and I would not use it as such. Much better for that purpose is the Dumb Money Confidence, and should we see a rise in that indicator to over 60%, then it would be time to batten down the hatches. As it stands, the current extreme in the Smart Money is enough to make me even more cautious in chasing strength, but not enough to get me to try to short into new highs.

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

ApproachingTheBell

10/10/06 3:25 PM EST

The S&P has been busy going nowhere today, building on the last four days' worth of going nowhere. We've built up quite a nice little wedge now between 1345 and 1355.

The rally off the July low has been filled with these temporary stop-gaps, and perhaps something to note is that each time, we saw a one- or two-day fakeout move to the downside before a quick reversal and move to a new high. I've written a lot about this in the past - the first move out of a tight coil is often "fake" as traders rush in on the breakout, then scramble to get out as it begins to reverse. So while very short-term traders can take advantage of a break either way by hopping on board, those with a bit longer time frame should be on the lookout for a reversal in the days following.

With the lack of movement in the indices, our intraday guides have been stagnant (though the cumulative TICK on the NYSE has been gradually sagging towards oversold) and I don't see reason to stop sitting on my hands.

LunchtimeLull

10/10/06 12:25 PM EST

So far we're seeing *yet another* tight-range day with an upward drift - hard to do anything unless you're already long and holding.

There isn't much that has changed, though the current TRIN reading on the NYSE is curiously low. This will happen when a lot of volume is flowing into a relatively small number of issues that are positive on the day. Despite overall breadth that is basically flat, every one of the top 10 volume leaders in the S&P 500 is currently positive, which is what is helping to skew the number.

At a current level of 0.66, the TRIN is at its lowest intraday point (other than the quirks seen in the opening few minutes) since September 18th. Any time other than when we're emerging from oversold conditions, very low TRIN readings like this typically lead to limited upside going forward.

That's about the only one of our intraday guides suggesting a foot on the brakes now, other than an extremely low equity-only put/call ratio (which is less reliable as an intraday tell). I'm still sitting on my hands.

MidMorningOutlook

10/10/06 10:25 AM EST

Good Tuesday morning...I'm not a huge believer in measured moves - the tendency for the market to move in like-sized waves - but I do pay attention to them.

I think it's interesting how the moves have played out over the past couple of years. Looking at each of the intermediate-term lows, we see the following in terms how many days the S&P rallied (and percentage gain) before going through a meaningful correction:

Aug 2004: 98 days, +14.1%

Apr 2005: 74 days, +9.4%

Oct 2005: 141 days, +12.7%

Current: 83 days, +10.4%

Average: 104 days, +12.1%

The average length of the rallies was 104 days, which was skewed by the Oct '05 - May '06 rally. We've already gone 83 days in the current upswing, and the S&P has tacked on more than 10%, just under the average of the previous swings. Something to think about if we continue to sing along happily during this traditionally rocky month.

What's holding me back from just plugging my nose and buying is the traditional weakness we see in the belly of October, and the multiple divergences we've seen between the S&P and other indexes like the NDX and VAY. In the Chart In Focus Video I posted regarding the SPX / NDX divergence, the average maximum gain the NDX was able to tack on over the following month was +1.8%, and we're pressing right up against that now.

I've mentioned that I would be interested in trying to buy - for a quick trade - an approach towards 1340 on the S&P 500 and/or 1665 in the NDX, and that's about all that interests me on the long side at this point. I have been expecting some weakness, or at the very least an increase in volatility, once the first few days of October passed, but so far I've been dead wrong on that score. This is one of those very difficult times where we have to decide whether we're being stubborn, or whether what we're seeing is within the tolerance zone of what we were expecting. What we've seen the past few days is unusual, but not so much that it has invalidated the reasons for looking for general weakness here in mid-October just yet. It's starting to press those limits, though.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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