Snapshot Notes - November 7, 2006

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TUESDAY, NOVEMBER 7, 2006

PostCloseSummary

11/07/06 5:00 PM EST

In strong intermediate-term uptrends, when we see a peak in momentum or short-term optimism, it's a good bet to expect further short-term price gains to be limited and temporary.

We have seen that time and again over the past few months when the STEM.MR model hit an "excessive optimism" extreme. It did so again late yesterday afternoon, which lead me to believe that further short-term price gains would be given back sometime during the next week.

We got a hint of that possibility today when the morning gains were mostly given back during the afternoon. We had some early hints of a weak trend day, but the qualifications that I laid out yesterday just weren't being met well (the TICK was spending too much time below the zero line, and subsequent rallies didn't see any TICK readings greater than +1000).

While the Nasdaq 100 was able to temporarily break above its October high, the S&P 500 was not, and momentum faltered as it approached that level. This is pretty typical behavior after a momentum extreme.

If today's election results go through uncontested, and those results are unexpected (both very big "ifs"), then there is a chance we'll get a sizable gap opening tomorrow morning - most likely down if there is a surprise. Barring that, we should continue to see choppy conditions with short-term rallies faltering and the first solid oversold reading bringing in buyers again.

Have a great evening and we'll see you here tomorrow!

ApproachingTheBell

11/07/06 3:25 PM EST

Given the momentum peak we saw yesterday (in terms of an overbought reading from the STEM.MR model), my thought was that just like every other time we've had this situation over the past few months, any further short-term price gains from late yesterday afternoon would be given back, and I would be willing to lightly press against the S&P 500 should it approach its October high of 1390.

It got quite close this afternoon, surpassing 1388 before the faltering momentum took over and resulted in an initial pullback of about 6 points. This type of trading should continue, and I'd have to see some time pass before believing that another breakout would be sustainable. I don't see anything intriguing on the long side in the short-term.

In determining what, if any, risk to hold overnight, don't forget the implausible - but still possible - chance of an outsized gap tomorrow morning due to surprising election results (though we're sure to see lawsuits from losing campaigns due to balloting glitches, so it could be weeks before we get concrete answers).

LunchtimeLull

11/07/06 12:25 PM EST

We're getting a kind of weak-sister repeat of yesterday's trend day, though the qualifications I noted yesterday haven't been met as clearly.

Compared to yesterday, today we're seeing less robust readings in the NYSE TICK, as it has hung below zero more often and the thrusts forward have not given us any +1000 TICK readings for the past couple hours.

Our intraday guides are still well into overbought, and as noted below this is a good sign that we had a peak in momentum and these additional short-term gains should be given back sometime during the next week. The election results are of course going to be a wild card, and potentially a major market mover. Frankly, I'm surprised that we've seen such a steady trend higher today, with a breakout in the Nasdaq 100 over its October highs, but I'm still interested in putting out some light shorts in the S&P 500 if it approaches its October high (1390ish).

MidMorningOutlook

11/07/06 10:25 AM EST

Good Election-day morning...We start the day with strength across the board, with higher-beta sectors again leading the charge.

The first sentiment survey to be released which reflects last week's pullback comes from lowrisk.com. That poll showed a rather remarkable willingness among traders to switch sides from bullish to bearish, with no stops in between. This survey is the "noisiest" one of the bunch, and can swing greatly from week to week, but the change in tone was striking.

After hitting a year-high bull ratio (bulls / (bulls + bears)) of 68% in mid-October, the lowrisk respondents shifted gears enough to pull the bull ratio down to 30% as of Sunday evening. That's the lowest amount of bullish opinion since late August.

This week's reading is fairly extreme, but not to the level that would have me expecting an immediate and sustained rally - I'd have to see something closer to a bull ratio of 20% for that. But if this is indicative of what the other surveys will show, and traders/investors are so quick to become bearish on the slightest of corrections, then those corrections should be shallow and quickly recovered.

As for the short-term, I mentioned yesterday that our STEM.MR model had entered "excessive optimism" territory for the first time since October 27th. In the context of a strong uptrend, that is not a consistently successful signal to immediately go short, but it is a very good indication of a peak in momentum - meaning that further short-term price gains are nearly always given back over the following week. Given that, and the uncertainty of the elections, I'm not expecting another push higher here to be sustained, and would consider some light short positions if the S&P 500 happened to approach its October high and began to fail.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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