Snapshot Notes - November 1, 2006

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WEDNESDAY, NOVEMBER 1, 2006

PostCloseSummary

11/01/06 5:00 PM EST

We haven't seen this bad of a start to November since 1994, once again throwing seasonality-minded folks for a loop, as we're in the midst of what has traditionally been one of the most consistently strong times of the year.

Based partly on that fact, I was looking to ride along with a potential breakout today, but only if we saw a demonstrated willingness and ability of buyers to push the high-beta Russell 2000 and Nasdaq 100 above their previous breakout levels. We did see that for a very brief moment this morning in the NDX, but small-caps couldn't follow through and that failure was a good tip-off that we didn't want to be early trying to anticipate a breakout.

Given the short-term positives we had, I was not willing to short the breakout failure, which ended up being a fairly significant opportunity cost. My focus has been on the 1700 area of the NDX, which for several reasons (outlined in the Mid Morning Outlook on the 30th) should hold a short-term correction. That seems to be doubly the case now, as our STEM.MR model for the Nasdaq is oversold for the first time since October 3rd.

Those oversold readings have resulted in an imminent low for the NDX on a consistent basis since the summer low. Which means, of course, that if that index can't hold 1700 here, then we have one of the first pieces of evidence in months that the character of the market is changing and we need to become more defensive. If that 1700 area should fail, then as long as we're below it I'll be interested in shorting short-term rallies.

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

ApproachingTheBell

11/01/06 3:25 PM EST

The lack of interest traders exhibited in chasing high-beta sectors higher this morning was a tip-off that we might not want to trust too much in the upside, and we've sold off steadily since.

Such a decline to begin November is relatively unusual - in the past 56 years, the first trading day of November showed a 0.5% or greater loss in the S&P 500 only 9 times. The weakness tended to continue a bit, as the following day was also negative 6 of those 9 times, though the average return was only modestly negative at -0.2%. Looking further out lead to returns that were in line with random.

The Russell 2000 has now broken below the lower end of its range at 760, and the S&P has also lost the 1370 level that many traders have been using as a support. I think the most important short-term level for the NDX is 1700ish, and that's the one I'm watching with the most interest - a move below that would violate several "shouldn'ts" and would make me more interested in attempting short trades going forward.

More aggressive traders would have certainly benefited by shorting into the high-beta breakout failure this morning, but given the trio of positives we were seeing, I was being more conservative and have been standing aside. Our short-term models are once again in oversold territory, including the one for the Nasdaq for the first time since October 3rd. This has had an excellent record at preceding market lows over the past few months, so if the NDX cannot hold that 1700 area now, then we have a good indication that "this time is different" and it would behoove us to more aggressively bet against further short-term rallies being sustained.

LunchtimeLull

11/01/06 12:25 PM EST

I mentioned earlier that if we were looking to try to ride a potential breakout, then we should see the higher-beta indexes move to the fore.

Instead of the fore, today they've turned tail and are well-represented at the rear. Small-caps, semis and biotech are some of the worst-performing major sectors on my screen right now.

With the trio of short-term positives outlined in the previous note, I'm not a fan of trying to short within the range we've carved out over the past couple of weeks, so until we either break out of this range or get another round of short-term extremes in our intraday guides, I'm doing little trading-wise.

MidMorningOutlook

11/01/06 10:25 AM EST

Good Wednesday morning...Yesterday afternoon, we saw a confluence of events that typically results in a positive market going forward.

Namely, we had short-term oversold conditions in a market that is in a defined intermediate-term uptrend and which is in the midst of one of the most consistently strong weeks of the year. It's hard to bet against that kind of setup and be consistently successful.

Even given those positives, I've been noting that due to the precarious nature of several of our intermediate-term gauges, I wanted to see some evidence that buyers were willing and able to push the high-beta Russell 2000 and Nasdaq 100 over their previous breakout levels of 770 and 1730, respectively. If we're going to see another sustained push higher, then it should be led by the more speculative areas.

Late yesterday and early this morning, we've seen the NDX do its part, but the little guys of the RUT can't quite get it together. That index keeps trying to kiss 770, but reminiscent of me in my teenage years, the smooches keep getting rejected. Unless and until those two indexes are able to surmount those humps, I don't have a lot of desire to try to anticipate another breakout.

As for shorting, that's not an option for me right now given the trifecta noted in the second paragraph above. I'd only be interested in trying to short if we see either 1) a move in our intraday guides back to extremely over-optimistic conditions, or 2) a move in the NDX back below 1700.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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