Snapshot Notes - October 20, 2006

http://www.sentimentrader.com/subscriber/subscriber_home.php

FRIDAY, OCTOBER 20, 2006

PostCloseSummary

10/20/06 5:00 PM EST

On Monday, I mentioned that commercial traders (aka the "smart money") in the equity index futures had increased the nominal dollar value of their net short position to $26 billion. That was one of the worst readings we'd seen over the years, but it'd have to be upwards of $30 billion or so to be more of a cause for concern.

In the latest release (covering positions through Tuesday), we see that commercials have, indeed, increased their net short position to over $30 billion. The chart below highlights previous extremes, which were December 2000 and December 2004:

On a (much) shorter time frame, we got a pretty typical expiration Friday - a tight range with high volume. Very often, we see weakness on the Monday following an expiration, though for some reason October has bucked that trend, with Monday being positive each of the past 8 years, and Tuesday through Thursday showing weakness.

The two-day range in the S&P is one of the tightest of the past year years, and it will almost certainly break on Monday. Typically these have had a negative bias in the very short-term, but either way it breaks it should pay for very short-term traders to chase it for a bit. These things have a habit of reversing in the days following, so overstaying your welcome may not be the best idea.

A few of our shorter-term guides are overbought on the NDX, pushing the STEM.MR model for that market out of its upper trading band - something that has preceded trouble more often than not.

I've been focused on the NDX over the past few days, looking for an opportunity to press short bets if and when it broke and held below 1700. It probed that area seven different times this week, but like a ball held under water, it kept popping back up. If we should happen to break this little range to the downside early next week, I plan on following along.

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

ApproachingTheBell

10/20/06 3:25 PM EST

The slow drift continues, and given the tendency for tight activity on expiration Fridays, I wouldn't be surprised if it carries into the closing bell.

I went over the implications of such a tight two-day range earlier, so that's something to keep in mind if we meander into the close. With the tight range and approaching weekend, the VIX has dropped about 4% and is threatening to close under 10.50 for only the 17th time since 1990. The only other instances in recent history were mid-July 2005 and mid/late-December 2005, after both of which equities weren't able to sustain short-term gains.

I've been focusing on the potential for a more aggressive short-term short posture in the NDX if it moved decidedly below the 1700 area that has been hanging tough, but it just won't give and it's left me on the sidelines for better or worse. I suspect I'll be heading into the weekend flat for trading positions (I won't be chasing any breakout of the range in the last 1/2 hour of trading), and will keep an eye on 1700 for next week - maybe the eighth time will be the charm.

LunchtimeLull

10/20/06 12:25 PM EST

The major indices have bounced back from their morning dip lower, and the NDX has rebounded more than Dennis Rodman as it survived its 7th dip below 1700 in the past week.

The S&P has been trapped in a 6-point range over the past two days. I've touched on this kind of thing before, but here goes again...there have been 10 other times since the beginning of 2004 where the S&P didn't move more than 6 points (high to low) over a two-day span.

Two days later, it showed a negative return every time but once. That one time lead to an upside breakout of the range, which was immediately reversed (late August of this year). When tight ranges like this eventually break one way or the other, it almost always pays for very short-term traders to chase the direction of the break, but after one or two days, we see a reversal a high percentage of the time.

I'm doing nothing trading-wise here until we see some kind of resolution of this coil. Expiration Fridays are known for tight, drifty action, so it's entirely possible we'll have to wait until Monday to see a more directional move.

MidMorningOutlook

10/20/06 10:25 AM EST

Good Friday morning...We begin this option expiry with a moderately negative tone as the major indices sold off right from the open.

October expirations have not shown much of a positive or negative bias, much like other months. However, the Monday following expiry has bucked the usual trend and has been positive each of the last 8 years. Most other months show a distinct negative bias the day following expiration.

Oddly, though, the Tuesday through Thursday following expiry has shown a negative return 8 of the past 11 years, including each of the last four years. I'm not sure what could explain this being different than other months, and it could just be one of those statistical flukes.

I've been asked a few times about the S&P's recent streak of consecutive days without a 1% daily decline. As of yesterday, the streak stood at 69 trading days, dating back to mid-July. This is the longest such streak since 1995, though it only ranks 23rd since 1950. Eleven streaks lasted longer than 100 trading days, and two approached six months (in 1963 and 1966).

I haven't found this to be any more useful than idle curiosity. Once streaks reached this stage, returns in the S&P going forward from a few days to a few months were muted - a bit less than random - but the percentage of time it showed a positive return were about in line. I don't see any edge in that data.

Is the seventh time the charm? The NDX dropped below the 1700 level I've been focused on yet again this morning, only to pop right back above - for the sixth time in the past week. As I type this, it's making another probe, and as noted previously I don't want to get too aggressive with short trades unless and until that area gave way. If it does hold below 1700 this morning, I plan on becoming more concentrated in short-term shorts as I think the waning momentum we've seen and some of the other negatives I've mentioned over the past week will take hold.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.