Snapshot Notes - October 13, 2006

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FRIDAY, OCTOBER 13, 2006

PostCloseSummary

10/13/06 5:00 PM EST

Yesterday afternoon we went over some of the readings we were seeing in our intraday indicators, such as the STEM.MR model. By yesterday afternoon, it had reached one of its most extreme readings in the past couple of years.

When we see that kind of behavior in the context of a strong uptrend, it almost always coincides with a peak in momentum, meaning further short-term price gains are most often temporary. This has happened a few times since the uptrend began in July, and the action today was in line with what we should expect.

I went over several other reasons yesterday that gave added weight to the idea of faltering momentum, at least temporarily. One more we could possibly add today is that the VIX implied volatility indicator closed under 11 for only the 60th time since 1990. Going forward after prior occurrences, trading over the following month was generally weaker than average, though most notably any gains made were very moderate.

Several times over the past month we've seen a large up day followed by two or three days of going nowhere. I suspect that's going to be the case this time around as well, with sustained upside unlikely and the first move back towards the breakout level of 1354 on the S&P 500 probably providing a good long entry for short-term traders.

The Stock / Bond Ratio that hit an extreme yesterday essentially became "maximum" extreme today with a reading of +3.3. Over the past 40 years of data, such a level has only been reached twice before - February 11, 1991 and December 31, 1991. After February of that year, the S&P went into a very choppy, slight uptrend for the next 10 months. After the December instance, equities dropped immediately and continued selling off for the next three months. Again, I'd refer you to a comment from March of this year for more background.

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

ApproachingTheBell

10/13/06 3:25 PM EST

With the muted rally in the S&P 500 today, the VIX implied volatility gauge has shed another couple percent and looks like it will end the week below 11.

That's a pretty remarkable feat, since there have been only 59 other days since 1990 that can stake the same claim. Generally stocks held up going forward, but returns were muted...the average maximum gain over the next month was +1.4% compared to an average maximum drawdown of -1.7%. Part of the reason for today's decline is simply that it's a Friday, but still it's worth noting.

Otherwise there's not much new to go over. We did get something of a rally attempt mid-afternoon but it was swatted down quickly which is in keeping with a market that has already seen a peak in short-term momentum. I continue to think it's going to be difficult to sustain any further pushes up over the next few days.

LunchtimeLull

10/13/06 12:25 PM EST

With the competing forces of a momentum extreme from yesterday afternoon likely limiting sustained upside, and buying interest coming in if/when the indices retreat to their breakout levels, I'm looking for range-bound trading again, but this is a bit ridiculous.

The S&P has been stuck in a 3-point range all day, which is not sustainable. I've been surprised quite a few times over the past couple of months, but I'd be shocked if we don't expand this range a bit by the close.

Our intraday guides have been working off their momentum extreme, of course, and so far what we're seeing is par for the course. We've seen this pattern play out several times over the past couple of months - a big up day, followed by two or three go-nowhere sessions. I'm still looking for any further short-term gains to be temporary, and a move back towards the breakout level (S&P 1354) to be bought.

MidMorningOutlook

10/13/06 10:25 AM EST

Good Friday morning...We begin the end to the week with a mixed market as traders digest yesterday's breakout.

In yesterday's Post Close Summary, I went over several reasons why I suspect that any further pushes higher from yesterday's close will likely fail, at least temporarily. There are a number of reasons supporting such a view, most prominently in my mind the degree to which our short-term guides became stretched.

With a closing reading of just 15%, the STEM.MR model for the S&P hit one of its most extreme readings in years. I don't want to belabor the point, but those kinds of readings in the context of a strong up trend almost always coincide with a peak in momentum, and further attempts at short-term rallies usually fizzle and drop back below the point where the model first became extreme.

Such momentum extremes signal something else, too...that there are a whole lot of willing buyers out there. In a downtrend, that's usually a very good signal to short the market, but when in an uptrend that is not as consistent. From a short-term perspective, I'm looking for another round of relatively range-bound trading - I don't think rallies will hold for long, and a move back down to the breakout level (1354ish on the S&P cash index) should find some support, especially the first time it's probed.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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