Snapshot Notes - October 30, 2006

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MONDAY, OCTOBER 30, 2006

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10/30/06 5:00 PM EST

When talking about seasonality, I always liken it to a gentle breeze either at your back or in your face. There are a few times each year where it tends to be a bit more than a "gentle breeze" - more like a stiff wind - and we're in the midst of one of those times now.

Generally the most consistent seasonality occurs around holidays, but the last couple days of October and first few of November have been as consistently positive as the days before any holiday (more so, actually). I went over the figures this morning, so I won't reiterate them now, but suffice it to say that during the next four days, longs have what has historically proved to be gale-force winds helping them along.

In addition to that, this morning several of our short-term guides entered oversold territory, a development I was watching for as a signal that it would likely be a good time to back off pressing short-side bets. For the first time since September 22nd, the STEM.MR model hit an extreme oversold condition - and when combined with the seasonality stuff noted above, it seemed like a good time to expect something of a rebound.

We did get a decent lift off the morning lows, and we continue to see that buyers are willing to step up and buy dips. A market that cannot rally from oversold conditions is one that usually leads to even more losses down the road, but since July we haven't seen any evidence of that.

With the bounce, our intraday guides relaxed their oversold conditions and are mostly mixed at this point. The major averages are also back in their previous ranges, which leaves us without much of a bias until the range breaks or we get another round of extremes in our guides.

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

LunchtimeLull

10/30/06 12:25 PM EST

Right after this morning's note, buying pressure came in and we've seen a decent bounce.

One thing about that buying pressure - it has been pretty narrowly focused. We can see that by the TRIN on the Nasdaq, which is currently giving an extremely low reading. This is something that usually leads to trouble in the NDX - in fact, that last time we saw it this low was as the NDX was topping out on the 23rd.

Digging a bit deeper, it seems as though most of the reason for today's low reading is due to American Power Conversion (APCC), which is jumping on extremely high volume.

If we play "what if" and assume APCC was down on the day instead of up 26% (!), then the TRIN on the Nasdaq would increase by nearly 50% over its current level. Usually low TRINs are a sign of concentrated buying pressure that isn't sustained, though with today's APCC anomaly, I don't think we can read too much into what it's saying.

We are right smack in what has traditionally been an extremely positive time of the year as noted earlier, and I'm not taking that lightly. We're also just now getting some oversold readings among our intraday guides (the STEM.MR model is now more oversold than it has been since September 22nd), a development that makes me even more leery about pressing the short side. So I'm going to back off short trades here and see if these factors lead to anything of note to the upside.

MidMorningOutlook

10/30/06 10:25 AM EST

Good Monday morning...I've been shying away from writing anything about seasonality lately, since it just hasn't worked well the past few months.

But there is one consistent pattern that gets quite a bit of attention, and I wanted to quick mention it. The last couple trading days of October and first few in November have been extremely positive over the past decade. Buying at the close on the third-to-last trading day of October and holding through the first three days of November has given a positive return every year since 1994 in the S&P 500. In the 28 years since 1978, this week has been positive 24 times.

In the Nasdaq 100, doing the same trade resulted in 18 winners out of 21 years for an average return of +3.5%. Remarkably, the average maximum gain during those five days was +4.7% compared to an average maximum drawdown of only -0.9%. That's quite impressive given the number of trades.

If we make a BIG assumption and think that the NDX will hold to its average maximum drawdown, then it shouldn't decline any more than about 17 points from Friday's close. 17 points would put it right at 1700, which is a very familiar level to us.

As I noted last week, 1700 would also equate to about a 45-point decline from the recent high - a point loss that has approximately halted prior short-term declines since the July low. So there are a few things coming together suggesting that a move below that general area should be unexpected, and would be a change in character that we can't ignore.

I noted on Friday that I would be focusing on short trades unless / until the Russell 2000 and Nasdaq 100 were either able to re-take their prior breakout levels (770 and 1730, respectively) or our short-term guides became oversold - neither of which is in danger of triggering at the moment. Other than that, a move back to 1700 would set up an interesting situation as we "should" bottom in that general area.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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