Snapshot Notes - November 29, 2006

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WEDNESDAY, NOVEMBER 29, 2006

PostCloseSummary

11/29/06 5:00 PM EST

Yesterday I wrote about one of the very few technical indicators I follow, which is a 3-period Relative Strength Index (RSI). That particular indicator for the Russell 2000 had hit a rare level of oversold (using daily data) over the past couple of days.

Watching the short-term performance in that index going forward after other extreme readings, it often gave us a good idea about the longer-term prospects of the general equity market.

Specifically, when extreme short-term oversold readings did not lead to a positive return one week later, then a high percentage of the time it indicated that there was months more of selling pressure to come. Those "failed" signals were rare, though, as typically the RUT was positive a week later.

That's why I've been quite intent on focusing on the short-term reaction to Monday's carnage, and so far equities are acing the test. There was a bevy of reasons to believe that Monday was possibly the start of something "different" compared to other short-term pullbacks since the July low, but we have seen no confirmation that that's the case. So far buyers have been willing to step in on weakness and keep pressing their bets as prices rise, which is consistent with what we've seen for the past quarter.

Given the more intermediate-term sentiment extremes we hit over the past couple of weeks, and the severity of Monday's selling pressure, I was unconvinced that we'd see an immediate rally and push to new highs. Needless to say, today's trading goes a ways towards suggesting that I was wrong in being so skeptical, which wouldn't be the first time buyers' resolve has surprised me over the past few months.

I still think the next few months have more downside risk than upside for those with a bit longer time frame - I gave another reason for that view earlier in terms of corporate insider purchases and sales - but for the short-term I'm standing aside until I see a better edge emerge.

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

ApproachingTheBell

11/29/06 3:25 PM EST

We've seen kind of a wild ride this afternoon as the major indices gave up a large chunk of their earlier gains then made them all back in the past 1/2 hour.

I think the jury's still out on whether what we saw Monday was par for the course or the start of something new as far as a potential trend change goes. For my part, I think it was hint of what's to come, but I need to see some kind of confirmation first before becoming overly anticipatory on the short side. And so far, we've seen buyers willing to step into the fray on weakness, so we still don't have any confirmation that Monday was anything other than just another short-term pullback within a healthy uptrend.

LunchtimeLull

11/29/06 12:25 PM EST

Something I don't touch on very often, but which does help fill out another wrinkle in terms of sentiment, is that of corporate insider buying and selling.

I monitor two services for this information, both of which I find do good jobs of filtering out inappropriate transactions and which are excellent overall services, www.insiderinsights.com and www.insiderscore.com. Both services have unique approaches to their methodologies, and currently both are giving similar signals as far as overall insider sentiment.

First, the chart from Insider Score:

While the holiday probably influenced the figures here, there was very recently a huge spike in insider sales vs. purchases - nearly a multi-year record. The 8-week smoothing of their insider ratio isn't yet to an extreme, but it's heading there quickly.

Next, the chart from Insider Insights:

The bottom pane shows the insider buy/sell ratio, and similar to the previous chart, we can see that the 4-week average is approaching multi-year extremes. The average has not yet turned up, which would trigger something of a technical sell signal, but it's clearly in danger territory.

These are a couple more confirming indicators that longer-term sentiment has become generally negative for the probability of sustained gains in equities when looking out over the next several months.

As for the short-term, all the major indices have held their opening gaps with no trouble, and we're actually seeing something of a trend day. If it holds, then we should continue to see buying pressure come in every time the NYSE TICK heads towards the zero line, with immediate rebounds to new intraday highs and minimal pullbacks of 2-3 points in the S&P 500, with a close near the day's high.

I've been unconvinced that this snapback would hold and lead to new highs, but I continue to see no evidence that it's a good idea to aggressively fight the uptrend just yet.

MidMorningOutlook

11/29/06 10:15 AM EST

Good Wednesday morning...Given the intermediate-term sentiment extremes that many of our gauges have reached in the past couple of weeks, and the severity of Monday's selling pressure, I've noted that I would be more interested in fading snapback attempts than in trying to buy the dip right away.

While we don't have any confirmation that this dip is any different than the other ones since the July low (in which short-term oversold conditions were bought immediately), the reasons in the first paragraph were enough that I doubted the probability of an immediate run to new highs.

The general level I was interested in pushing against was 1390ish on the S&P 500 cash index, which roughly coincides with the breakout we saw in mid-November. With this morning's seemingly all-around positive GDP report, we jumped above that area with a gap up open and so far have held up well.

That leaves us with a lack of evidence that a larger trend change is underway, and I'm holding off trying to trade against this move higher for now. I want to see real evidence that buyers are not willing to step up in the face of oversold conditions before becoming aggressive with shorts, and I can't see anything suggesting that's the case yet. If we fall back and hold below 1390, I'd be interested in putting out some "feeler" short positions just in case sellers do step up again, but I'm not willing to push any longer-term short positions yet.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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