Snapshot Notes - November 30, 2006

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THURSDAY, NOVEMBER 30, 2006

PostCloseSummary

11/30/06 5:00 PM EST

Seasonality has been given as an oft-cited reason to expect the rally from the July lows to continue at least into the new year. Most reports seem to suggest that the possibility of a decline during December is almost heresy.

What I don't see mentioned much is that except for the first trading day, the initial couple weeks of December have actually had a negative overall bias, if anything. For example, the S&P 500 has shown a negative return from the 2nd through 10th trading day of the month 6 out of the past 11 years. It's worse for tech stocks - the Semiconductor HOLDR (SMH) has been negative 4 of the past 6 years with an average return of -1.9%. So an upside continuation simply due to the calendar is not a given by any stretch of the imagination (at least until we approach Christmas).

Many of our shorter-term guides entered an extreme overbought condition late this afternoon, which notably included the Cumulative TICK for both the NYSE and Nasdaq. This has pushed our STEM.MR model for the S&P to an extreme as well.

I've noted often over the past few months that these model extremes - in the context of a strong intermediate-term uptrend - are not necessarily effective signals to sell short, but they have been extremely effective in highlighting momentum extremes. This means that any further short-term pushes to the upside have almost universally been rejected within a week, and I expect that to be the case this time around as well.

While the positive bias surrounding the first trading day of December (even given seasonality's relatively poor showing over the past few months), I'm a bit gun-shy about being aggressive with short positions just yet, but I do feel that any additional upside from here will be temporary and I am focused exclusively on short setups.

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

ApproachingTheBell

11/30/06 3:25 PM EST

The continued push higher this afternoon has begun to show up in several of our shorter-term guides, which are now either in or near overbought territory.

I've noted before that my favorite of these indicators is the cumulative TICK, and that reading on the NYSE just hit +5800, the highest reading in two weeks. Even during the strong uptrend off the July lows, such egregiously stretched TICK readings have lead to only moderate future short-term gains, if any - and typically even those were given back within a few days.

We haven't quite seen enough of a confluence among the indicators to push the STEM.MR models for either the S&P 500 or Nasdaq 100 into "excessive optimism" territory just yet, though the one for the S&P is this close.

By the time that model hits an extreme overbought reading, we'd likely be sitting at a new high in the S&P itself, which creates a dilemma. I don't have any desire to be holding short positions with that index hitting new highs (and the first trading day of December having a decidedly bullish historical bias), but I also don't want to be buying with a model reading that leads to negative returns a great deal of the time when it stretches over its upper trading band. So I'm going to focus here to see if the S&P peters out before stretching to a new high, in which case I'll likely try to hop on board and ride whatever weakness may come, but if we head higher and hold new highs, then I'd be out until we saw some kind of failure of the breakout.

LunchtimeLull

11/30/06 12:25 PM EST

The early-morning attempt to break out over yesterday's highs was soundly rejected among all the major indices, and we've been in something of a holding pattern ever since.

I mentioned earlier that I'd really only be interested in potential short setups if we either approached last week's high in the S&P 500 or fell below 1390, and so far we're drifting between the two. There isn't anything particularly notable on my radar at this point.

MidMorningOutlook

11/30/06 10:15 AM EST

Good Thursday morning...Monday's post-holiday whack was apparently enough to scare at least a few folks, as the most recent release from the AAII sentiment survey suggests.

That poll of individual investors, which includes responses submitted through Wednesday evening, shows that 47% of them expect the S&P 500 to be lower six months from now. That's the highest level of bearishness since late September and is in the top 5% of readings in the past 20 years.

One part of one weekly survey isn't nearly enough to suggest that Monday's decline was enough to wash away the excessive bullishness that has been building, but if more evidence emerges that folks are so quick to turn tail on short-term pullbacks, then perhaps there will be more life left in this trend than I had been suspecting.

As for the short-term, this time of year is commonly known to show a positive historical bias. That's not true for all the days, though - the last trading day in November has been positive only 4 times since 1995 in the S&P. That changes very quickly as we enter the new month, as the first day of December has been positive during 9 of those same years.

I have been quite suspect of the possibility of an immediate run to sustained new highs, and have been focused on seeing if we get some confirmation that Monday's action was not just another flash-in-the-pan pullback like the others we've seen over the past few months. That confirmation has been lacking, though, so I'm not yet willing to stick my neck out on the short side. That will likely change if we either approach last week's highs in the S&P and begin to roll over, or we get a breakdown and slip back below 1390 in the cash index.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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