Snapshot Notes - December 1, 2006

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FRIDAY, DECEMBER 1, 2006

PostCloseSummary

12/01/06 5:00 PM EST

We haven't had a day this volatile in quite some time, with the S&P 500 making four trips of greater than 10 points during the trading day.

By early afternoon, many of our shortest-term gauges had already made a trip back into oversold territory. I noted the TRIN earlier, as well as the STEM.MR models, which had cycled to a place that has preceded at least short-term rallies in equities over the past few months.

Given that we once again had a bounce off short-term oversold conditions, it's hard to argue with the idea that we're in a different market environment now than we've seen since the July low. I've been looking for evidence of that, as it gives a good clue as to whether we should expect a deeper pullback in the days/weeks to come, but so far that evidence has been lacking.

Since we just had a peak in momentum on Thursday afternoon, it would be early to expect another sustained run at new highs, even considering the slight oversold readings we got this afternoon. So I'm still inclined to lean to the short side, and don't think a breakout would hold at this point.

The latest Commitments of Traders report that was released prior to the close showed that commercial traders reduced their net short position again by approximately $2 billion in the latest week while small speculators increased their net longs to $25.5 billion. Both net positions are still historically extreme and still what I would consider an intermediate-term negative for the market.

Have a safe and relaxing weekend and we'll see you next week!

ApproachingTheBell

12/01/06 3:25 PM EST

The erosion this afternoon has served to spike several of our short-term guides to the point where they could be considered oversold, and it is close to being enough to push the more reliable STEM.MR models for both the S&P 500 and Nasdaq 100 to extremes.

The TRIN for the NYSE is what is sticking out in particular, with one of its highest intraday readings in the past month. High TRIN readings are indicative of extremely concentrated selling pressure, and more often than not it has lead to at least a short-term rebound.

It's more consistently successful in that regard if it's being confirmed with other short-term extremes, and getting to that point now. I've backed off a bit on pushing shorts, but I still think a trip back towards the highs is more likely to fail than stick.

LunchtimeLull

12/01/06 12:25 PM EST

We're seeing another volatile day as the morning drop has lead to a mini-recovery heading into the lunch hour.

I haven't seen anything that changes my thought that we saw a peak in momentum on Thursday and further short-term rally attempts will be given back. Even during a very strong uptrend like we've seen the past few months, that pattern has been consistent.

MidMorningOutlook

12/01/06 10:15 AM EST

Good Friday morning...We start the historically positive first day of December with weakness across the board (might as well keep seasonality's streak going, eh?).

One of the longer-term pieces of data that we follow was released yesterday, and it concerns the level of liquid assets (i.e. cash) at U.S. mutual funds as of the end of October. While the stock market rallied during the month, which typically results in lower cash levels, we also saw a marked rise in short-term interest rates, which also exerts a strong influence, but in the other direction (fund cash levels tend to rise along with short-term rates).

Cash levels during the month fell from 4.3% to 4.1%, and given the rise in short-term rates, it pushed the Mutual Fund Cash Surplus / Deficit to -2.91%. This means that funds "should" be holding about 7% of their assets in cash, instead of the 4.1% that's being reported.

I've noted previously that there are reasons why we could be seeing this indicator enter a lower longer-term range, but still the current level has been matched only a couple of times in history, neither one of which was good for stocks over the next year or so. This has been what I would consider a negative for most of this year, with seemingly no effect, but I continue to believe it will be a negative long-term factor.

As for the short-term, I mentioned yesterday that our shortest-term guides had indicated that equities reached a momentum peak yesterday afternoon. Even during the strong uptrend off the July lows, previous momentum peaks meant that any further upside pushes were temporary in nature, as they were given back within a week.

While I don't particularly like the idea of initiating or holding shorts if the S&P 500 would happen to reverse and hold at a new high, chasing a breakout seems like an even worse idea. As it stands, I'll be concentrating on shorts unless the S&P does break out, in which case I'll back off and watch for a failure.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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