Snapshot Notes - November 3, 2006

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FRIDAY, NOVEMBER 3, 2006

PostCloseSummary

11/03/06 5:00 PM EST

Coming into today, we had some pretty compelling evidence suggesting that more of a bounce was due if we were in the same kind of market environment we've been in for the past several months.

While we got a (rather poor) bounce off of a gap down opening yesterday morning, this morning we got a spike up off the opening bell which invited selling pressure almost immediately.

That the major indices couldn't hold the opening gains wasn't a good sign, and it was pretty much downhill from there as the Nasdaq 100 fell below its lows from the prior afternoon, then eventually also lost that 1700 area we've been watching carefully.

I've been using that general area as a pivot point to determine how I want to concentrate my positions - focusing on short sales on short-term rallies if the NDX falls and holds below there. Like we saw a couple of weeks ago, though, the index is rather magnetized to that level, and we didn't see anything decisive this afternoon in terms of whether it is going to hold or not.

Our short-term models are still quite oversold, which always makes me hesitate before trying to short. They were also oversold yesterday, though, and that didn't lead to anything special on the upside, unlike previous instances since July. So until we get a bit of resolution here as to whether buyers are finally going to step in or step away, I've gone flat.

Towards the close, the CFTC released the latest Commitments of Traders report, which showed yet another increase in the "smart money" commercial net short position. As you can see from the chart, the positions are now truly extreme - the current $39 billion hedge against a market rally is now the second-largest in history, behind $40 billion on March 6, 2001 (after which the S&P lost 11% over the next month). This has been a yellow flag for a couple of weeks, but that flag is quickly turning bright red.

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

ApproachingTheBell

11/03/06 3:25 PM EST

The major indices haven't done much of anything since the last note. My focus has been on the Nasdaq 100 lately, which has been threatening to do something it shouldn't do, which is break and hold below 1700.

It's been another tussle at that area, like we saw a couple of weeks ago. I'm content to stand aside and wait until we get some kind of clarification on whether today's weakness was a fakeout before the expected run higher, or a rest stop on the way to lower prices. I don't see any short-term edge in pressing either side, so I will be flat heading into the weekend.

LunchtimeLull

11/03/06 12:25 PM EST

I noted earlier that a move in the Nasdaq 100 below 1705 would make me more defensive, and a failure of 1700ish to hold would have me transitioning to selling rallies.

1705 fell not long after, and we're hanging around that general 1700 area now. The indices have failed to respond well to what had previously been a good long setup (short-term oversold conditions during a strong uptrend with very positive seasonality). That's a big caution flag.

I'm not rushing to short, but will concentrate on selling intraday rallies if price holds below that 1700 area. I don't see an intriguing setup from the long side here - our short-term models are quite oversold, but they were yesterday too and we haven't seen price respond as it should.

MidMorningOutlook

11/03/06 10:25 AM EST

Good Friday morning...Due to a number of factors, we had good reason to believe that if the Nasdaq 100 approached the 1700 area, then it should at least see a short-term bounce.

We got that opportunity yesterday morning, and the positives kicked into gear a bit. Even by yesterday's close, though, we weren't seeing traders buying too much into the idea of an acceleration of the rally, which typically means there's more ahead.

We did get a pretty good spike this morning, but enough selling pressure came in almost immediately that the NDX has already closed its opening gap. Two potential positives are that the other major indices didn't confirm the spot of weakness in the NDX, and higher-beta small-cap stocks are leading this morning.

If we're going to see more of a rally here, then we really shouldn't see the cash NDX index fall back below 1705ish. If we do, I'll become more defensive, and if that index falls and holds below the 1700 area in spite of the reasons why it should rally, then I will transition to selling short-term rallies as long as that 1700 area is above.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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