Snapshot Notes - October 16, 2006

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MONDAY, OCTOBER 16, 2006

PostCloseSummary

10/16/06 5:00 PM EST

This afternoon, I mentioned that for meeting my qualifications for a "trend day", today's action sure seemed uninspired.

We went from the opening bell to the closing with the NYSE TICK barely spending any time below zero, and almost every time it did, it rebounded quickly towards +1000. Even after hitting that kind of positive extreme, however, the S&P backed off only a point or two. Typically when we see that kind of behavior, the S&P ends up with a gain much greater than today's.

In fact, over the past five years, the average return when we see consistently positive TICK readings during the day is +0.8% - triple what we saw today. The last time we got such a positive TICK day with so little to show from it was last December 23rd. In fact, the vast majority of "high TICK / low return" days occurred immediately before exchange holidays, so this one is coming out of the blue.

It's hard to make a bullish or bearish case for this because it's so very unusual, but I do believe that it's indicative of a market that is losing its momentum. That would fit quite well with our short-term model readings which hit true extremes late last week, and which almost always coincide with a peak in momentum. If this is the case, then trying to continually chase strength here becomes increasingly dangerous, and it's not something I wish to do.

While I don't think the short-term gains added since Thursday's close will last, likewise I don't think we'll get far to the downside before buying interest comes in. Should we retrace down to test the breakout level around 1354ish on the S&P, I suspect we'll at least get a short-term bounce on the first try.

Longer-term, I'm starting to become more concerned. Our Smart Money Confidence dropped down to 29% as of today's close, one of the lowest readings in the past 15 years (most of the others were clustered in 1999/2000/2001). The Dumb Money Confidence - the better timing gauge of the two - ticked up to 54%. I'd much prefer to see a reading over 60% before getting too bearish here, but the spread between the two is now at -25%. This is the worst since December 2004 and definitely now in the warning zone.

I'm starting to sniff around for a probing short sale on the NDX. I want to see some weakness first, so if we drop below 1722ish in that index, then I'm going to concentrate on trying some short sales there. Again, if we do see a pullback, I'm not sure how far we'll get before last-chance buyers see their opportunity, but given the waning momentum I think it's worth a shot.

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

ApproachingTheBell

10/16/06 3:25 PM EST

Last Thursday, I went over the criteria I use to determine if it's likely that we're going to see a "trend" day or not - one of those days where we see a steady move from open to close with only small retracements in between.

Thursday was a classic example, and oddly enough today has met the criteria I use in regards to TICK readings and intraday retracements. The weird thing is that the S&P 500 is only up about 3 points - I can't find another time in the history that I have where we met the criteria of a trend day but the S&P has so little to show for it. I've only done a cursory review, but usually we would be up at least 10 points with this kind of behavior.

I don't want to go so far as to suggest that it's bearish, simply because I can find no precedents, but I do think it's a sign of waning momentum, which is not a shocker given that we saw a momentum peak late last week. For shorter-term traders, this is often a very challenging environment - we're too stretched to give a decent risk/reward on long trades, but in the context of a strong uptrend, trying to short based off of a momentum peak like we saw rarely gives much of a reward either.

I've been mostly sitting on my hands Friday and today, and I don't see that changing just yet. I'm surprised that the S&P has held up as well as it has (more confirmation that I do not want to try to short this thing), but I remain unconvinced that the short-term gains since Thursday's close are gong to be sustained.

LunchtimeLull

10/16/06 12:25 PM EST

We're seeing a crazy-tight range so far today in the S&P, and I'm actually going to re-post the Lunchtime Lull comment from Friday, as we're repeating those conditions almost exactly today:

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

10/16/06 10:25 AM EST

Good Monday morning...Looking at the data that came out over the weekend, we saw a couple things of note in our more intermediate-term gauges.

After several weeks of not moving much, our ROBO put/call ratio moved down rather suddenly last week. This ratio looks only at the very smallest of options traders (less than 10 contracts per trade) and filters out all trades other than those that were bought to open. So it's about as "pure" a ratio as we're going to get, and last week we see that these guys bought 1.2 million calls as opposed to 576,000 puts.

There was one brief week in early July with a similarly low ratio, otherwise the current reading of 0.49 is the lowest since late May and is a far cry from the pessimistic readings we were getting in August. Still, it's not to the extreme where we can comfortably conclude that small traders are betting whole hog on continued upside - we'd need to get a ROBO reading of under 0.40 for that.

Switching gears and looking at one of our "smart money" gauges, commercial traders in the index futures increased their net short position as of last Tuesday to $26.6 billion from $24.7 billion the week prior. That's in the bottom 5% of all readings in the past 20 years, but again not quite to the point where it would have me looking for an imminent market peak. If their shorts increased to $30b +, that's when I would become more concerned about a near-term, significant intermediate-term pullback.

On a longer-term time frame, with the Smart Money Confidence at a four-year low of 33%, we have to cast a doubtful eye on the sustainability of price gains going forward, but with a Dumb Money reading of only 50%, it doesn't fit with history to expect an immediate and sustained collapse. The Dumb Money is a much better timing tool in terms of precision.

In the short-term, I've mentioned before that I use very, very few common technical indicators, but one that I do use is a 3-period RSI (Relative Strength Index). On a daily basis, the 3-day RSI on the NDX is currently sitting at 94, a true extreme. Over the past year, it has hit a similar level five times and 3 days later the NDX was negative all five times, by an average of -1.1%.

That meshes well with our short-term sentiment indicators, which pushed the STEM.MR model to 15% on Thursday, one of the most "stretched" readings in the past few years. Again, these kinds of extremes taken in the context of a strong uptrend are generally not consistently successful shorting signals, but are excellent at highlighting momentum extremes - meaning further attempts at short-term rallies are usually not sustained, and that's what I believe will happen here. It seemed a good idea at the time to chase Thursday's breakout, but I have backed off those longs and am awaiting a better setup.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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