Snapshot Notes - December 14, 2006

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THURSDAY, DECEMBER 14, 2006

PostCloseSummary

12/14/06 5:00 PM EST

In today's morning note, I mentioned that due to the circumstances coming into today, a break to new highs had a better-than-normal chance of developing into a trend day.

These are the rare days where stocks open near their lows, close near their highs and suffer only very minimal retracements in between. By watching how the S&P 500 trades during the morning, along with the behavior of the NYSE TICK, we can get a relatively good idea about whether this is going to happen or not, and today stuck to that script closely.

The more interesting development is in the Nasdaq 100, which once again put on a quick show in the morning, then went on hiatus for the remainder of the day. That index happened to stop right at last week's highs, at the same time we got a number of extreme overbought readings in our intraday guides and STEM.MR model.

Fridays on which options expire are typically choppy days without much of a directional bias, though the Monday following often suffers "expiration hangover". Given those tendencies and our overbought short-term model, I'm going to be watching the NDX even more intensely than usual as a tell for the broader market. The high-beta sectors have been lagging lately, which is a bad omen, and if they roll over now we'll almost certainly see a false breakout in the broader indices like the S&P.

I still have a general preference for long trades so long as the S&P remains above 1415ish, but I'm not pressing things now given the tendencies around expiry - and the NDX will be front and center on my screens.

On a longer-term time frame, as of today's close the spread between the Smart Money and Dumb Money Confidence will drop to -39%. This is the most negative reading since August/September 2000 and is obviously a concern for the intermediate-term. We have seen not-quite-so-extreme readings in Decembers 2003 and 2004, after which the broader market was able to drag itself higher for a few more weeks before trouble set in.

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

ApproachingTheBell

12/14/06 3:25 PM EST

The behavior of trading today in the S&P 500 has been consistent with a trend day, something I mentioned this morning had a higher likelihood of occurring due to the circumstances coming into today.

Despite modestly higher prices, nothing much has changed from the prior note. The extremes I mentioned then are pretty much at the same extremes now, as is the Nasdaq 100, which I want to watch closely for signs of failure.

Barring a reversal in that index, if today is going to stay true to form, then we should see the S&P close at or near its high for the day. Given the historical tendencies surrounding option expirations, however, I don't plan on pressing long-side bets too much longer - expiration Fridays tend to be choppy affairs with little directional movement, and the Monday following expiry has a less-than-admirable track record for those holding long positions.

LunchtimeLull

12/14/06 12:25 PM EST

The indices have again coiled into a tight range after the quick move this morning, something that's become a pattern lately.

There are a few truly extreme readings among the short-term guides that I watch. The VIX implied volatility gauge has dropped to a level seen only once in the past 16 years, that being December 1993. And the TRIN on both the NYSE and Nasdaq exchanges is tickling multi-month low levels, telling us that the buying power is being concentrated in relatively few stocks. In addition, the equity-only put/call ratio is showing a heavy skew towards call options, but that is no doubt being influenced by expiration.

All of this activity has pushed the STEM.MR model for the Nasdaq 100 into "excessive optimism" territory for the first time since November 15th. Considering how that index has not made it to a new high, I'm very interested in watching to see if it suffers a reversal here.

These kinds of readings typically lead to flat or lower prices, but like I said earlier, a breakout to new highs after seeing a tight week-long range (during December, no less), ups the chances of seeing a trend day, where markets open at their low and close at their high, with minimal retracements in between. So far what we've seen today would qualify.

I'm troubled by our intermediate-term gauges, which seem to have a tendency to reach these kinds of extremes during Decembers. But there is also a tendency to not see the markets crack until after the new year, which I suspect is going to happen again in 2007. So in the meantime, as long as the S&P holds above its prior highs, I want to focus on long opportunities. I'm on pins and needles, though, considering my intermediate-term concerns and the NDX situation (grossly overbought and holding beneath its highs).

MidMorningOutlook

12/14/06 10:15 AM EST

Good Thursday morning...Yesterday I wrote about the muddled mess we're seeing in the short-term ,with the major equity averages sloshing around in a loose range for the better part of December.

Due in large part to where we are on the calendar, I was more willing to try short-term long trades should the S&P 500 be able to break out and hold at new highs, as long as our intraday guides are not at overbought extremes (which they aren't).

This is with full understanding that the spread on our Smart Money / Dumb Money Confidence moved to -35% at yesterday's close, which is the most negative since late November 2004. Like we saw then, though, and again in late December 2003, in the context of a strong uptrend such negative readings are not necessarily an immediate sell signal, but rather an alert that if we are going to see additional gains, then they are most likely going to be given back in the intermediate-term. I suspect that if we manage hold up the rest of this month, then the same will prove to be true this time around as well.

A whole slew of buy stop orders were triggered as the S&P traded to new highs this morning, and now the watch begins to see how far the initial retracement will go. I'm always wary of false breakouts when we have an intermediate-term sentiment condition as stretched as we do now, but as I noted I will be concentrating on long positions as long as the index remains above that prior resistance (approximately 1415 in the cash index, 142 in SPY and 1430 in the e-mini futures).

With the S&P trading at a new high, coming after the compressed range we have seen over the past week, there is a better-than-normal chance that we'll get a trend day today. If so, then we shouldn't see the S&P give back more than 2-3 points after NYSE TICK readings above +1000, and we should see buying pressure come in every time the TICK comes back and approaches the zero line.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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