Snapshot Notes - November 15, 2006

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WEDNESDAY, NOVEMBER 15, 2006

PostCloseSummary

11/15/06 5:00 PM EST

For much of the trading day today, we saw a moderate trend day, as every time the NYSE TICK approached the zero level, buying interest came in and pushed the major indices to new highs.

The pressure wasn't all that overpowering, though, as we didn't see many TICKs over +1000, which is more normal for a sustained trend day. The pattern was broken, anyhow, after the release of the FOMC minutes caused something of a stir.

The morning move was enough to push many of our intraday indicators, and both STEM.MR models, outside of their upper trading bands. In the Lunchtime Lull note, I showed a composite chart of the previous five times this has happened since the summer lows.

Those five instances were consistent in that over the next five trading days, the S&P 500 had a difficult time maintaining additional upside thrusts - every time it gained even an additional 0.5% or so, it was beaten back over the next few days. While those with a short-side preference might be able to scalp some points here and there, historically these extremes have lead to a choppy market that didn't exhibit much of a pronounced directional bias.

Our Smart Money / Dumb Money Confidence indicators have now reached a notable mark, which is that both of them can now be considered to be negative for the market. This is the first such case since January 2004, and January 2002 prior to that. The higher the Dumb Money Confidence, the more we should worry about an imminent and sustained decline, and as of today's close it was just barely extreme at 61%.

But this is one more negative to add to a quickly growing pile, and it makes me more convinced that some of these recent gains are going to be given back in the months ahead. I'm not ready to bail out of intermediate-term longs just yet, much less place short sales, but if we see a continued deterioration among our intermediate-term measures, then that will become more of a possibility.

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

ApproachingTheBell

11/15/06 3:25 PM EST

The release of the October FOMC minutes this afternoon served to inject a little volatility into what had been shaping up to be a weak trend day.

In the last post, I showed a composite chart of the five other times since the July low that both of our short-term STEM.MR models exceeded their upper trading bands at the same time, like they did this morning. It's notable that not one of the other instances lead to more than a 0.5% gain in the S&P 500, and approaches towards that were given back the three times it occurred.

So I'm still not interested in chasing prices higher here, rather I'll wait for our short-term guides to come back down out of the stratosphere. Trying to short based off extremes like this can be good for a few points, but again one would be fighting an extremely persistent trend and the risk/reward isn't all that favorable.

LunchtimeLull

11/15/06 12:25 PM EST

The major indices have been chugging along in a slow, creeping uptrend this morning as buying pressure has been relatively weak but very consistent.

The continual pressure has pushed almost all of our short-term indicators into overbought territory, including the STEM.MR model for both the S&P 500 and Nasdaq 100. This is the first time since October 27th that both models have been outside of their upper trading band together.

I'll reiterate that stretched short-term conditions like these - in the context of a strong intermediate-term uptrend - are not good signals to sell short the indexes, but rather they have been most effective at highlighting momentum extremes. We've seen over and over during the past few months that when these models get stretched, any further short-term gains have been given back within the week.

The chart below shows what happened over the next five days in the S&P 500 the five other times both STEM.MR models poked outside of their upper trading bands since the July low.

MidMorningOutlook

11/15/06 10:15 AM EST

Good Wednesday morning...We start the day with another positive open after yesterday's fairly explosive breakout, and mostly the same sector leadership as well.

The latest Investor's Intelligence survey, released this morning, reported the largest one-week surge in bullish opinion since June 2005. This is finally to a point now where the poll could now be considered to be showing excessive optimism for really the first since since the summer rally began.

With only 22% of the sample reporting to be expecting a market decline, we're now seeing the lowest percentage of bears since December 2005. This ratio dropped under 20% at some of the other peaks over the past few years, so there is a bit more room for this to become even more extreme, but historically there is no question that the current reading is excessive.

If we have a moderately positive day today, then there's a good chance that our Dumb Money Confidence will surpass the 60% threshold - which would also be the first time since last December. When we were seeing the extreme in the Smart Money Confidence as it dipped below 30% in mid-October, I noted ad nauseam that it was not a good timing gauge. Much better for that purpose is the Dumb Money Confidence, and at the time it was not indicating that an imminent decline was likely.

With it possibly poking above 60% today (and the Smart Money still below 40%), we could have the first legitimate red-light signal from these measures for the first time since mid-January 2004, and early January 2002 before that.

Over the past decade, whenever the Smart Money has been below 40% and the Dumb Money above 60% at the same time, the average one-month return in the S&P 500 going forward was -1.3% with 40% of days showing a positive return. The average maximum loss during that month was nearly twice as great as the average maximum gain. That was still the case six months later, though the average return dropped to -2.6%.

There were times where such a condition only lead to a short-term consolidation before the S&P powered higher, like September 1995, June 1997 and February 1998. But there were more when the market went into a multi-month funk (or outright downward spiral) soon thereafter, like October 1997, July 1998, July 1999, April 2000 and January 2004 as examples.

As for the short-term, I, along with most other shorter-term traders, will be watching the breakout level of 1390 in the S&P. We had a textbook breakout there, and a retracement back towards that area should serve as an opportunity for those who missed the move to get back in. With so many watching for it, we may not get it as traders become impatient and start to jump in anyway. That's not my style (especially with our short-term gauges now registering a large number of overbought extremes), so if we continue to ramp higher over the coming days, then I'll be left out.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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