Snapshot Notes - December 12, 2006

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TUESDAY, DECEMBER 12, 2006

PostCloseSummary

12/12/06 5:00 PM EST

On a "typical" day when the Federal Reserve announces the decision for its short-term interest rate target, the major stock indices rarely make a move of any magnitude before volume drops off precipitously in the hours before the decision.

Today was something of an outlier in that we got a fairly sizable move heading into the announcement, though as per usual there were a few relatively violent swings afterwards. After all was said and done, most indices saw modest losses.

There is a tendency for the moves after major economic releases (Fed decisions included) for the initial move to be "fake". That means that we often see a counter move in the days following the release, though it's more pronounced if the initial move is large.

Our short-term guides are mostly mixed and not giving much of a clue one way or the other. The S&P 500 and Nasdaq 100 both suffered morning declines that took them right to the support areas I noted this morning and they promptly bounced back, so we continue to have little reason to expect anything other than additional rally attempts until that changes and prices begin to follow through on the concerns that have been highlighted over the past few weeks.

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

ApproachingTheBell

12/12/06 3:25 PM EST

The Fed didn't do or say anything unexpected, so as is usually the case after these things, we have seen a couple of violent whipsaws as traders adjust their positions.

With this market-mover out of the way, we're seeing a rapid drop in implied volatility again. Even though the Nasdaq 100 is negative by half a percent, the implied volatility on NDX options has dipped by more than 7% and is hanging at its lowest level in a year. The NDX is at the same price it was four days ago, yet bets on future volatility have cratered by over 20%, so it sure seems like a lot of traders are counting on the next couple of weeks adhering to its typical pattern of low volatility and positive prices.

Both the S&P and NDX bottomed close to the levels I noted this morning, and so we again don't have much of a reason to get overly negative on either of them yet. With our intraday guides mixed, I'm sitting out these whipsaws and waiting for a better setup.

LunchtimeLull

12/12/06 1:45 PM EST

Apologies for the delayed post, we are suffering some technical issues on this end.

The major indices took a modest spill this morning, and you can pick any number of possible reasons why. It's quite unusual to see this magnitude of a move so soon before a Fed rate decision, but volume over the past hour has dried up per usual and that should continue into the decision.

Unless the Fed does or says something unexpected, which would likely be negative for the market no matter what it is, we should see a couple of relatively violent moves after the announcement before a more stable directional move into the close.

Both the S&P 500 and Nasdaq 100 dropped to the areas I mentioned this morning (141 in the S&P fund SPY and 1775 in the NDX), so I suspect we'll vacillate around here until the decision. If attempting to trade short-term after the decision, beware the tendency for volatile whipsaws.

MidMorningOutlook

12/12/06 10:15 AM EST

Good Tuesday morning...The latest lowrisk.com sentiment survey was released last night and showed a large rebound in bullish opinion, to a bull ratio of 71% (meaning that of those that expressed an opinion, 71% expected the DJIA to be higher 30 days from now).

That's the highest ratio in over a year and has been matched on only four other weeks since the bull market began in 2002, with decidedly mixed results going forward - two were modestly positive after a month and two modestly negative.

I've been seeing quite a few references among those bullish on the market's prospects to the AAII sentiment survey, which has been recording a large number of bearish respondents. Typically the argument goes that this is a demonstration of the "wall of worry" that bull markets climb.

I noted this spring that increasing bearishness in the face of rising prices is not often a positive thing, and that proved to be the case this spring as well. But you don't have to take my or anyone else's word for it, let's just look at the facts - there have been three other times in the past 20 years (excluding our current situation) when the AAII survey showed more than 40% bears at the same time the S&P 500 was hitting a new yearly high.

The first was in the summer of 1989, after which the S&P went nowhere for the next year. The next was September 1993, after which the S&P once again went nowhere for the next year. The last one was March 2000 after which the S&P went deeply south.

As for the short-term, obviously the Fed announcement this afternoon is the focus du jour. Typically we see a moderate morning move, then volume dries up substantially by 11:00am EST until the decision. Then we get two or three violent whipsaws before a more directional move in the last half hour. Whatever move the indices make this morning could be erased within a few minutes after the announcement.

I pointed out yesterday that the high-beta Nasdaq 100 has gone 12 days without hitting a new 30-day high, the longest stretch since the bull move began this summer. It has been able to close above 1775 during the past few weeks, so that area and its intraday lows around 1760 will be a focus - that index closing below those levels will suggest that we've gone from an uptrend to a range-bound market at best.

For its part, the S&P has been able to consolidate above its breakout area (141 in SPY and 1420 in the e-mini futures), and as long as our intraday guides are not at overbought extremes, it's hard to be too negative on that index as long as its above those prior highs.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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