Snapshot Notes - November 16, 2006

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THURSDAY, NOVEMBER 16, 2006

PostCloseSummary

11/16/06 5:00 PM EST

During the day yesterday, I went over a chart that showed future S&P 500 performance when both of our short-term models hit overbought extremes at the same time.

I don't want to beat a dead horse, but that's the template I'm working off of at this point, which essentially means that I'm not expecting a sustained directional move in the short-term, especially to the upside. Short-term gains after the five other overbought instances since the July low lead to no more than a 0.5% additional gain in the S&P, which would translate to that index holding below 1405 (in the cash index) for now.

We're also seeing more of our intermediate-term gauges turn less market-friendly as both our Smart and Dumb Money Confidence indicators hover outside of their respective bearish (for the market) thresholds. This is only the third time we've seen this happen in the past five years, and while I would like to see a spike in the Dumb Money Confidence to issue a solid sell signal, what we have now is enough of a concern to think seriously about hedging market risk.

Buying some protection is now more affordable than it's been in some time, at least on the S&P. With actual volatility scraping along the bottom of the barrel, and implied volatility (represented by the VIX) threatening to close under 10% for one of the few times in its history, index options are a relatively cheap purchase for some peace of mind in what is becoming an increasingly dubious uptrend.

My best guess at this point is a couple days of not going much of anywhere, then another push higher around the traditionally positive Thanksgiving holiday, then a larger pullback after that.

On a side note, next week I will be on my annual migration to the great woods of Northwestern Wisconsin. I'm leaving tomorrow morning, so there will be no intraday indicator updates or notes through next week (I will be doing brief Post-Close Summaries after each close). Also, the daily indicator updates will be delayed by possibly a few hours each evening during the week.

Have a great evening and we'll see you after the close tomorrow!

ApproachingTheBell

11/16/06 3:25 PM EST

The indices have drifted slightly higher all day, in spite of relatively weak performance from the sectors that often lead the broader market.

For the past day, I've been harping on future short-term performance after both of our short-term models hit an extreme condition together, as they did yesterday morning, and I continue to use that as a template here.

This afternoon we're also seeing the VIX implied volatility gauge slink its way close to 10 for one of the very times in its history. Really the only comparable period to our current one in terms of actual and implied volatility is late December 1993. After volatility became as low then as it is now, the S&P 500 popped higher over the next month, then went into a three-month funk.

We're also seeing very concentrated buying pressure today, with the TRIN on the NYSE dropping to a current level of 0.64. This is one of the lowest we've seen during this uptrend, and while I put more weight on very high TRIN readings as a buy signal during longer-term uptrends, very low TRIN readings at least signal a bit of caution is in order. Like the overbought model readings, when we've seen other low TRIN levels during this rally, further short-term gains (if any) were most often given back in the days following.

So I'm stuck with my current short-term stance - I have no desire to try to chase prices higher here, but from the short side the risk/reward isn't all that great either.

LunchtimeLull

11/16/06 12:25 PM EST

Despite relatively poor performance among the higher-beta sectors (small-caps, biotech, semiconductors, internets), the major indices have been holding up pretty well all day.

I'm not convinced that they're going to be able to continue to do so, though, and am using the chart I showed yesterday as a guide. If it holds, then we really shouldn't see the S&P 500 cash index trade above 1405ish in the coming days, but rather see a choppy market with a slight downward bias.

MidMorningOutlook

11/16/06 10:15 AM EST

Good Thursday morning...We start the day with a gap up open that was quickly squelched in tech-land but the broader indices are still clinging to their opening prices.

Yesterday I showed a chart of other times since this persistent uptrend began in July that both of our short-term models hit overbought extremes at the same time.

The performance in the S&P 500 going forward was consistent in that there was only limited upside over the next week (there were no 1/2 hourly closes more than +0.5% from the point where the models became extreme) - we saw universally choppy moves ahead with a slight downside bias.

If that template is going to hold here, then we shouldn't see the S&P (cash index) make any sustained move over 1405. That would be 0.5% above the point where the models hit their extremes, and again it then wouldn't fit too well with the five other precedents from the past few months.

I'm becoming even more concerned about the intermediate-term sustainability of these moves as well, since both our Smart and Dumb Money Confidence indicators are in bearish (for the market) territory for only the third time in the past five years.

I'd prefer to see more of a spike in the Dumb Money Confidence before issuing a "get out now" signal, but from going over the component indicators, it doesn't look like that's going to happen any time soon. The current condition is enough to suggest caution, especially with new purchases, but not yet enough to think that it's prudent to sell everything and cower under a rock.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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