Snapshot Notes - November 27, 2006

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MONDAY, NOVEMBER 27, 2006

PostCloseSummary

11/27/06 5:00 PM EST

Looking at the landscape last week, one thing was becoming more and more clear - risk in equities was rising quickly, and insurance to protect against a potential pullback was the cheapest it had been in a long, long time.

When seeing such a combination, it makes sense to purchase some downside protection, and today's action is the type of activity where the insurance comes in handy. Surely, this is only one day, but there are a few signs that what we saw today is different than what we'd been seeing since the July low.

Primary among those differences is breadth. I noted earlier that a breadth reading of -1500 on the NYSE had preceded a nearly immediate upside reversal in the S&P 500 almost every time it happened except for once. And a breadth reading of -2000, which is where we closed, was the worst since mid-May.

We also saw true extremes in most of our shortest-term indicators. Our short-term models were off the charts, implied volatility has jumped nearly 20% in the past couple of days, and the TRIN on the Nasdaq closed at its highest level since 2004.

Once again, this is not something we saw much of since July, and coming so soon after many indices hit new highs, it smacks of a change in market character, where traders are more willing to sell into a down market than they have been.

All of this will be moot if we turn around right away and hit another batch of new highs. But it should happen very quickly - like Tuesday or Wednesday - or it will be clear that things are different this time.

In the Commiments of Traders released late this afternoon, there was little change as large commercial traders (aka the "smart money") reduced their record net short hedge against equities from $48 billion to $46 billion. This remains an intermediate-term red flag.

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

ApproachingTheBell

11/27/06 3:25 PM EST

Barring a late-day comeback, the S&P 500 will have ended its 94-day streak without a 1% decline from the prior day's close.

That's quite a streak - we'd have to go back a decade to find the next-most recent case. Since 1950, there have been 12 streaks greater than 90 days, and I was curious to see what happened going forward after the other ones ended.

Overall, there wasn't much consistency. The next day, the S&P declined again 7 of the 12 times with an average return of -0.1%. Looking out up to two weeks later, the percentage of time positive and average return were in line with any other random time. About the only thing that sticks out is that one month later, the S&P was positive 10 of the 12 times with an average return of +1.8%. Not much to get excited about either way on any time frame.

We're on track for the worst-breadth day since May 17th, and again the obvious conclusion is that this is different than the other short-term pullbacks we've seen. This will become even more apparent if we do not see a recovery over the next day or so. Our intraday guides are in extreme oversold territory at this point (which is also not something we've seen much of during the rally from the July lows), so pushing shorts here is questionable, but I continue to believe that short-term rally attempts are more likely than not to fail.

LunchtimeLull

11/27/06 12:25 PM EST

Breadth on the NYSE reached -1500 earlier this morning, meaning that 1500 more stocks were lower than Friday's close than were above Friday's close.

This is a significantly large negative number - the worst we have seen since mid-October. I am watching this closely for one reason - since the July low, breadth has been skewed this negatively on six other occasions (using 1/2 hourly readings). Every time but once, the S&P 500 staged an immediate rebound.

That one outlier was September 6th, after which the S&P chopped for a bit, then slid an additional 10 points. I'm a big believer in consistency and market character - as long as equities keep responding as they recently have to various short-term conditions, then there's no reason to believe the uptrend won't continue.

It's when reactions to those conditions change that I become more interested in looking for a turn. And when we see that the broader market has jumped every time breadth hit -1500, then I'm going to watch for that to happen again. And if it doesn't, then I want to become more focused on looking for additional downside.

Perhaps not coincidentally, September 6th was also the last time breadth became as bad as it is now, which is about -1900 according to my quote vendor. So the combination of extremely bad breadth and the (so far) lack of an almost immediate rebound has me continuing to lean towards more of a pullback. Some of our shortest-term guides, especially on the Nasdaq 100, are getting very stretched to the downside here, but I don't think whatever snapback may come will last.

MidMorningOutlook

11/27/06 10:15 AM EST

Good Monday morning...Traders gear up for the post-holiday week with a market that had gone pretty much nowhere for the previous week, which was typical for the conditions we were seeing at the time.

I noted prior to the holiday break that while the short-term was murky due to seasonal influences, those with a bit longer time frame would likely do well to consider purchasing protective put options, especially if equities held up on the days surrounding the holiday.

The reason for that was the almost daily deterioration in our intermediate-term guides, and the relatively cheap cost of buying some insurance for a portfolio. I still think that's a good option to consider, particularly if we get additional short-term rallies going forward, even though the VIX has jumped nearly 20% in the past few days.

As for the short-term, I mentioned last week that the small intraday ranges we were seeing typically lead to weak returns going forward, and now we no longer have the positive holiday bias to potentially add some support. I don't want to harp too much on seasonality since it hasn't been that great of a guide the last half of this year, but the end of November through mid-December has only shown moderate returns - nothing greater than normal - and I don't think seasonality alone is any reason to buy here.

Our intraday guides are mostly mixed now, and the S&P 500 (cash index) is closing in on the 1390 "breakout" level that I imagine a large bunch of traders will be watching keenly. I'll be looking for a smallish bounce as that area is approached, but I'm more interested in fading short-term rally attempts.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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