Snapshot Notes - December 6, 2006

We didn't get much movement today in the major indices, or for that matter most of the major sector groups either.

Such lackadaisical trading activity was enough to relax most of our intraday guides, which has already pushed the STEM.MR model towards the lower end of its range. We saw a similar type of behavior in early October and late November, two other times the model had hit an extreme overbought reading that didn't result in an immediate short-term correction in the S&P 500, but it's not typical.

I've been banking on the idea that we'd see more of a pullback, and a false breakout in the S&P, at least in the short-term. Given the history of how that index has behaved after previous instances of our short-term model exceeding its upper trading band, the probability seemed good that we'd see similarly choppy to negative conditions this time around as well.

The fact that the S&P has held above its prior highs while short-term indicators have corrected is a positive, and if we don't see a movement back below those highs very soon, I'll be backing off the idea of looking for a deeper pullback. Very tight intraday ranges like we saw today also tends to precede weakness, but again that should kick in very soon if it's going to kick in at all.

It's been a slow, low-volume, tight-range day today without much intraday movement at all among most everything that I follow.

I've written about these kinds of tight-range days quite a bit previously (lastly on November 21st), and how they tend to precede market weakness. There remain some good reasons to expect more of a pullback here, but again I don't want to bet heavily on that outlook unless we begin to see prices actually follow through somewhat on that possibility. A break below the recent highs at 141 in SPY (and 1410 in the e-mini S&P 500 futures) would be a first step in that direction.

The STEM.MR model is already making its way back towards its oversold region, so I would really prefer to see some weakness very soon in order to keep this "more of a pullback ahead" idea on my radar.

We've gone precisely nowhere since the opening print in the major indices, and most sectors as well.

The lack of movement is also being reflected in our intraday guides, so I don't see any reason to change my outlook.

Good Wednesday morning...We enter the mid-week with tech dragging the broader market lower, ostensibly off YHOO's disappointing management shake-up.

The latest Investor's Intelligence survey was released this morning with a new 2006 high in those newsletters who said they're bullish on the market's prospects.

At just under 60% of respondents, the percentage of bulls is showing one of the highest readings in the past 20 years. Looking at unique instances only, I can find 9 other times when the bullish faction has been as crowded as it is now.

The table below shows the return in the S&P 500 one and three months after the other occurrences:

	1 Month Later	3 Months Later
Average Return	-0.7%	-1.3%
% Positive	44%	56%
Average Max Gain	+2.4%	+4.4%
Average Max Loss	-3.4%	-7.9%

This includes two other instances during December (2004 and 2005), neither of which preceded an imminent market peak, but the gains after which disappeared in the months following.

The numbers would have looked quite a bit worse if it weren't for a reading in mid-January 1987. After that bullish extreme, prices kept chugging along and tacked on some very good gains over the next seven months.

However, that's when we got the next extreme, in late August 1987, and that pretty much top-ticked the market before the crash in October.

I continue to believe that the risk in being long in the short-term is excessive given the probable peak in momentum from Monday afternoon, and would feel more comfortable on the short side if the S&P would lose its recent highs (approximately 141 in SPY and 1410 in the e-mini futures).

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