Snapshot Notes - December 15, 2006

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FRIDAY, DECEMBER 15, 2006

PostCloseSummary

12/15/06 5:00 PM EST

With index options set to expire at this morning's opening prices, the pre-open release of the tame CPI report sent some traders scrambling to buy index futures to cover short option positions.

That heavy, forced buying took the Nasdaq 100 proxies close to their November highs, on what would have been the largest opening gap in two and a half years had it held until the opening of regular trading. As it stood, we still got a relatively large gap up open on an expiration Friday, something that has proved to be a poor bet for buyers in the past (with only 4 out of 21 winning trades if holding 'til the close, including today).

Given those crosscurrents, and the fact that our short-term models had hit "excessive optimism" extremes just yesterday afternoon, shorting intraday rallies in the NDX seemed like a pretty good bet. During the day, the indices did chop lower, and it was enough to relieve the excesses in our short-term indicators - to the point that the Cumulative TICK actually hit an oversold extreme.

There was a very unusual situation that happened today in the S&P 500. The index itself closed more than a point higher than its close yesterday. However, the components of the index that closed positively on the day gained about 87 points while those that closed lower lost nearly 117 points.

A negative 20-point differential on a day that the index itself closed in positive territory has happened only four other times in the past four years. I'm not sure it means anything, though two weeks later the S&P was negative all four times.

The moves after a major option expiration are unpredictable, and often negative. After that, though, the bulls will have free reign as far as seasonality goes. As outlined earlier, when the S&P 500 has shown a decent positive return heading into the final part of the year, it's been consistently positive when closing out the year.

After that, the piper will likely be paid. The NDX has a nasty habit of giving back its gains in a short period of time during Januarys, and given the status of our intermediate-term sentiment guides, that pattern should continue.

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

ApproachingTheBell

12/15/06 3:25 PM EST

The gradual downtrend since the opening bell has moved our short-term guides well off their overbought extremes. The Cumulative TICK has actually moved toward an oversold reading as we've seen some consistently large moves below zero this afternoon. I'll be flat going into the weekend.

LunchtimeLull

12/15/06 12:25 PM EST

Unless the S&P 500 really takes a dive in the next few days, it looks like it might have a good chance of closing out the year on a high note.

Whenever that benchmark index has been up by 10% or more heading into the final week of the year, that final week was positive 20 out of 23 times with an average return of +1.2%. While the first week in January was also positive more often than not (65% of the time), the percentage of time positive and average return decline the further out in the month we look, to the point where the entire month of January was actually negative more often than not.

This fits with what has become the common belief that markets will hold up into the end of the year. Whether that's already reflected in current prices, I don't know, but like I went over in this comment a couple of years ago, equities (and particularly tech indices) have a tendency to take a sudden, significant spill in January. Given the status of our intermediate-term guides, if we do happen to respect historical tendencies and levitate into the new year, I would be intent on taking advantage of the cheap insurance by buying put options a couple months out.

As for the short-term, I mentioned this morning that I had backed off the long side and was more interested in fading intraday rallies in the Nasdaq 100, which is still my focus.

MidMorningOutlook

12/15/06 10:15 AM EST

Good Friday morning...This market has been flouting all kinds of historical tendencies the past few months, so we might as well keep the streak going.

Expiration Fridays are normally quiet, choppy days, but today already has thrown that out the window. Index options were settled for cash as of the opening prices of the component stocks this morning, so with the surprisingly tame CPI report and potential gaps up in many stocks, some traders with expiring options were forced to buy index futures to limit losses on positions whose values had suddenly changed.

After the CPI report, the Nasdaq 100 trust (QQQQ) had gapped up by +1.8% over the previous closing price. If that would have held until the open, it would have been the largest gap up since April 2004. Large gap up opens invite sellers, especially during the bull market of the past few years.

Historically, large gap up opens on an expiration day have been batted down with regularity - in the history of QQQQ, it has gapped up by more than +0.5% on an expiration Friday 20 times. Buying that open and holding 'til the close resulted in only 4 winning trades and an average return of -0.7%.

With our intraday guides having hit extremes just a few hours ago, I don't think we'll be seeing a sustained move above this morning's opening prices. I noted yesterday that I still have a general preference for long positions as long as the S&P remains above its breakout area (around 1415), but I backed off longs late yesterday afternoon with our extreme model readings and don't plan to revisit them in the short-term due to the historical performance during and after expiration days and the history of QQQQ after large gaps. If anything, I'm more interest in fading intraday rallies in QQQQ.

On a side note, for those who watch the S&P 500 tracking fund, SPY, and are wondering why it's down today, it's because it went ex-dividend by $0.79 at the open.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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