Snapshot Notes - October 17, 2006

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TUESDAY, OCTOBER 17, 2006

PostCloseSummary

10/17/06 5:00 PM EST

Despite a relatively stiff whack in several important sectors, the broader equity averages held up pretty well - in fact, the S&P just barely failed to close above its opening price after an afternoon reversal.

Still, the futures had enjoyed a run of 10 consecutive days with a close greater than its open for only the fourth time in its history (I have some minor conflicting data on the open and close for a couple of those days, so depending on the quote source, two of the days might not have qualified).

The other occurrences (1/17/92, 8/27/93 and 9/13/95) gave returns going forward that were consistent with a market that had expended a great deal of momentum. Over the next month, the average maximum gain was +1.2% compared to an average maximum loss of -2.0%.

Waning momentum has been something that I've touched on several times in the past few days. We got a peak in momentum last week, and what we've seen since then is typical of a market that has to struggle to keep any further gains.

I mentioned in the second note today that I had backed off my short trades as I wanted to see if buyers would come in once we approached the breakout levels in the S&P and NDX. Such a thing is what nearly always happens the first time we retrace back to a spot where the major indices break out, and we saw it once again today.

With some of the extremes we've seen over the past week, I'd be surprised if this was it for a pullback, but I'm not yet trying to short again. So far equities have done nothing wrong, other than making a peak in short-term momentum. Buyers are still obviously eager to participate, and the past few days have seen a pattern similar to the other short-term surges over the past few months. But given some of the negatives I've pointed out recently, if we can't recover here and instead break below 1354ish on the S&P and 1700ish on the NDX, then I'll once again become more interested in pushing on the short side.

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

ApproachingTheBell

10/17/06 3:25 PM EST

In an earlier note, I mentioned that I had backed off my short trades as we declined towards the breakout levels in the S&P and NDX, as I wanted to see if those levels would hold. Typically after a breakout like we saw last week, the first move back towards the breakout area will see a bounce as those who missed it see their chance to get in.

That seems to be the case this time around as well, as all we've seen is buying pressure since I posted that note. While there certainly has been waning momentum over the past couple of days, technically equities have still not done anything "wrong" - which has been the case for several months now, and which makes pressing short trades (other than in the very short-term) a high-risk idea.

I mentioned the TRIN on the NYSE earlier, but other than that measure most of our intraday indicators haven't become oversold. I'm hanging back on new trades here, as I want to wait and see what's going to happen with the bounce off the morning lows. If buyers have enough juice to push us to new highs, then we're back in the same kind of deal we've been in for the past couple of months. If, instead, the major indices instead begin to roll over again, then I will be looking to focus on short trades again - even moreso if the breakout levels around 1354 in the S&P and 1700 in the NDX fall by the wayside.

LunchtimeLull

10/17/06 12:25 PM EST

The major indices have continued to drift lower as the morning has worn on, and we're starting to approach some interesting levels here.

The first test of a breakout level generally tends to hold, and the S&P is closing in on its breakout of 1354, and the NDX at 1700ish. If we were getting more extremes in our intraday indicators, I would be tempted to start looking for a short-term long trade as those levels get closer, but as it stands I've just been backing off short trades to see if they hold.

The TRIN on the NYSE has exploded higher today, as volume has been very heavy in those issues that are trading in negative territory. At 2.50, it's higher now than at any time since the severe selling in mid-June. Coming after a decline like it was then, such lopsided pressure tends to coincide fairly well with market lows, but coming the day after a new yearly high, it's not so consistently bullish.

MidMorningOutlook

10/17/06 10:25 AM EST

Good Tuesday morning...We start the day with a large gap down open on extremely heavy volume. Looking at the index futures and ETFs, this morning we're seeing the heaviest opening 1/2 hour of trading volume since June.

It's relatively rare to see such a large gap down after hitting a new high for the move just yesterday. I show 25 instances in the history of QQQQ where it gapped down 0.5% or more after hitting a new three-month high the day before. It closed the day higher than the open 7 of those times (with an average return of -1.1%), and only once did it rally enough to close higher than the previous day's close. Needless to say, it would be highly unusual to see a complete reversal today.

I mentioned in yesterday's Post Close Summary that I was looking to short the NDX, and indeed I am concentrating on that strategy and that index. With a drop of over 1%, we've already seen the magnitude of a move that normally takes an entire day to play out, so I'm not sure how wise it is to press even more, but intraday rallies should see sellers come in. I'm using yesterday's high as a general level to abandon my short bias, and frankly I'd be extremely surprised to see that any time soon.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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