Snapshot Notes - December 4, 2006

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MONDAY, DECEMBER 4, 2006

PostCloseSummary

12/04/06 5:00 PM EST

Our intermediate-term gauges are, for the most part, showing an excess amount of bullishness on the part of traders and investors, something that normally leads to sub-normal market returns going forward.

Due to the positive way buyers have been responding to short-term oversold conditions, however, we have little in the way of evidence that the excessive bullishness is having an impact just yet. It is that evidence - in the form of a change in market character - that I have been looking for during the past couple of weeks, and so far I've yet to see it.

But during the uptrend over the past few months, one of the constants has been that when we see a peak in momentum, the market stalls out and further short-term gains are very often given back within the week.

That's applicable now since we hit another momentum peak this afternoon. This is unusual after seeing one so recently (Thursday afternoon), and I've highlighted the other occurrences over the past month in the chart below:

It's pretty clear that when the STEM.MR model has exceeded its upper trading band, it has preceded choppy conditions at best. Even during one of the most positive seasonal times of the year during Thanksgiving, the S&P 500 wasn't able to tack on more than a few points, and those were given back promptly when traders returned.

Given that there's little reason to suggest that we've seen a change in character, I don't see any reason why we should expect anything different from this model reading than what we've seen from the others.

On a side note, I'm going to require another close above 1408 in the S&P before moving the official site position back to long. There's a relatively high risk of this breakout failing, and new long positions getting whipsawed.

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

ApproachingTheBell

12/04/06 3:25 PM EST

I've been noting that while I thought a failure of a breakout to new highs in the S&P 500 was more likely than not, I am not interested in trying to initiate or hold shorts if that index holds at a new high.

It is trying to do just that this afternoon, continuing to make good on Friday's short-term oversold condition. Over the past couple of hours, the index has been waffling near those highs, and it isn't clear yet whether the breakout will hold.

Muddying the picture a bit is the fact that the STEM.MR model for the S&P just exceeded its upper trading band, so we're on the verge of once again seeing a peak in momentum. I'll repeat what I have said every other time this has occurred in the past few months...in the context of a strong intermediate-term uptrend, these kinds of model readings have been very good at highlighting those times that further short-term pushes to the upside were not sustainable, as virtually every time the gains were given back within the week.

I'm continuing to look for a failure of this potential breakout.

LunchtimeLull

12/04/06 12:25 PM EST

Some of you have likely noticed today's TRIN reading for the NYSE, which is throwing off an extremely oversold reading at a current level of 1.7.

I've touched on these kinds of readings often (they've given good heads-up of recent short-term market lows), but today's should be taken with a big grain of salt. I'm no fan of making excuses for indictors, but there are times to make exceptions - such as today.

The reason for the oversold TRIN is due solely to Pfizer's shellacking. With the blue-chip stock down about 12%, it has already traded close to 190,000,000 shares. If we flipped that one stock from the "minus" to "plus" column today, the NYSE TRIN would be giving a more normal reading close to 1.0. Don't read anything into today's reading.

The major indices are all hovering near important zones - either new highs (in the case of the S&P 500 and Russell 2000) or last week's highs (Nasdaq 100 and DJIA). I have absolutely no desire to try to initiate or hold shorts if the indices break and hold at new highs - like I noted below, we haven't seen any solid evidence yet that we're in a different market environment than the past few months.

Perhaps the short-term oversold condition from Friday afternoon was enough to wipe away the momentum extreme from Thursday afternoon, but typically that kind of volatility leads to at least a short-term trend change. I'm continuing to watch for a failure of this run towards new highs, but again I won't be holding any shorts if we hit new highs.

MidMorningOutlook

12/04/06 10:15 AM EST

Good Monday morning...We begin the week with a large bank merger, which has spurred the bank indices higher and it's dragging the rest of the market with it.

Recently, the investment bank UBS released the results of their monthly UBS Investor Optimism survey. The most interesting part of the release, fitting into the category of it-would-be-funny-if-it-weren't-so-sad, is that as of mid-November, a record low number of folks felt that energy was hurting the economy - just as energy was forming its low. This contrasts with an overwhelming majority who felt that was the case in August - just as energy was putting in a major high.

The dismal record of these respondents extends to their stock market outlook as well. The overall index of investor optimism hit a record high of 178 in January 2000, and a record low of 5 in March 2003 - both of which were fantastic times to take the opposite side of those extremes.

Currently the index stands at 93, which is effective as of mid-November. During the recent bull market, readings over 90 were seen from November 2003 - February 2004, June 2004 and January 2006. The latter two were pretty good sell signals, while the broader market was able to push higher for a couple of months after the November 2003 instance.

That fits with many of the other longer-term gauges on the site. We're seeing very high bullish opinion in terms of the past few years, but not necessarily compared to the peaks in 1999/2000.

As for the short-term, my thought has been that since we just saw a peak in momentum on Thursday afternoon, we wouldn't be able to see a sustained run at new highs just yet - in keeping with the pattern of the past few months. We did get some moderate oversold readings with the volatile swings on Friday, which once immediately brought in buyers, so that somewhat tempers the overbought extreme from Thursday.

I'm still more interested in looking for a failure at or near the November highs than I am a breakout and runaway move higher, but I'm not going to be willing to initiate or hold short positions if the S&P 500 does trade at and hold a new high since we still have zero solid evidence that we're in a different market environment than we've been in since August.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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