Snapshot Notes - November 2, 2006

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THURSDAY, NOVEMBER 2, 2006

PostCloseSummary

11/02/06 5:00 PM EST

The decline we've seen in the major averages over the past few days has made a lot of folks wonder about the sustainability of the rally off the July low, judging from much of the commentary out there.

While a couple of the gauges I follow aren't reflecting that kind of apprehension (witness the Rydex fund flows from this morning's note), for the most part we have seen a pretty good dose of concern rise up the past two days.

Our short-term indicators cycled into deep "overly pessimistic" readings late yesterday and early today, and when we combine that with the other factors outlined in the comments over the past few days, it made sense to believe that the 1700ish area of the Nasdaq 100 should hold, at least temporarily.

Our STEM.MR models for both the S&P 500 and NDX are still oversold, suggesting that we should see additional rally attempts here. If we instead just roll over (especially if the NDX loses that support zone), then I'll become more interested in shorting any short-term rally attempts, as we will have seen a change in market character that should lead to more trouble down the line.

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

ApproachingTheBell

11/02/06 3:25 PM EST

I've mentioned often that I don't use many technical indicators. Really the only ones are a couple of moving averages and a 3-period Relative Strength Index.

On a daily chart of the S&P 500, that 3-day RSI is in danger of closing under 15, which is well into short-term oversold territory. I checked for other times that index reached such a reading in November over the past decade, and came up with five instances. 3 trading days later, the S&P was positive all five times by an average of +2.3%.

In four out of the five cases, the maximum drawdown in the S&P was less than -0.5%. This is just a little further confirmation that short-term dips during this time of year have very often been good short-term buying opportunities. That low drawdown figure is another data point suggesting that we shouldn't see much additional downside here if this is going to prove to be something of a market trough.

That fits well with the other points we've gone over regarding the Nasdaq 100, and its should-be support of 1700ish. As long as these general areas hold in the coming day(s), then there should be little concern about a more protracted and imminent decline. But if we roll over soon, violate those levels and hold below, then the likelihood of even more difficulty ahead rises significantly.

LunchtimeLull

11/02/06 12:25 PM EST

We've gotten a bit of a bounce off the morning lows, but nothing to get overly excited about. Things look OK for some kind of stabilization here, and perhaps more upside attempts as the positives noted earlier try to work their magic, but I'm not expecting fireworks here.

Just as an FWIW, I've moved the stops on my positions to breakeven, so if the NDX fails to hold the morning gains, I'll be out with no harm no foul.

MidMorningOutlook

11/02/06 10:25 AM EST

Good Thursday morning...One of the reasons I've been placing less emphasis on asset flows among the various Rydex index mutual funds over the past year or so is because the way traders are using the funds has changed.

It used to be that on a big down day in the market, we'd see large flows out of the bullish-oriented funds and flows into bearish funds or the money market. That's not the case anymore, as more often than not we see traders buying bullish funds on large down days and bearish funds on up days.

Yesterday is a prime example - the Nasdaq 100 fell nearly 1.5%, yet assets in the leveraged NDX fund that Rydex offers (which increases in value by 2% when the NDX rises by 1%) jumped by almost $100 million, an increase of 24% over the prior day's assets.

In the past three years, we've never seen traders trying to "buy the dip" to this extent. On previous 1% or greater declines in the NDX, we saw assets in the leveraged fund balloon by 10% or more three other times - May 11th, August 1st and just a few days ago, October 27th.

Two years ago, I would have said that this kind of behavior among these traders was a clear sell signal. Nowadays, I don't place nearly as much weight on these index fund flows, but yesterday's was so extreme that we have to at least note it as a potential negative.

Yesterday I showed that the STEM.MR model for the Nasdaq hit oversold for the first time in nearly a month. Previous excursions of the model into excessive pessimism territory had almost universally lead to an imminent rally in the Nasdaq 100.

There are a few factors that have lead me to focus on 1700 in the NDX, and when combined with the current oversold reading in the model, we really should see that general area hold today. If the index can't sustain trade above there, then it will have violated a whole gob of "shouldn'ts", and I will transition to focusing on selling short-term rally attempts. Until then, though, I nibbled on some longs off the opening gap, looking to see if all these positives are going to blossom into a short-term bounce. If it wilts instead, then my stops are close below and it won't hurt too much to find out if this time is different.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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