Snapshot Notes - December 19, 2006

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TUESDAY, DECEMBER 19, 2006

PostCloseSummary

12/19/06 5:00 PM EST

Coming into this morning, we had some relatively severe oversold readings from our short-term guides, and the mess from Thailand served to make a severe condition even worse.

Within a half-hour of the opening bell, the STEM.MR model for the Nasdaq 100 recorded a reading on a par with the most stretched readings of the last half of this year, and like a rubber band stretched to its limit, the model began to curl up - a sign that the selling pressure should abate. Either that, or we're in a whole new ballgame from an intermediate-term perspective.

As has happened on every other occasion since July, buying pressure came to the rescue, particularly once we approached the December lows. This is what I was looking for yesterday, and the fact that we once again saw a bounce when we should suggests that, at least for now, there's no evidence that the character of the market has changed.

The S&P 500 got about a 10-point lift of the morning lows, which meets the minimum move from past oversold readings. With that index close to its highs again, and our short-term guides back to neutral or even cycling into overbought, we're back to an overall neutral short-term outlook. I don't have any intention of trying to short unless we get a confluence of our short-term guides signaling overbought conditions while the major indices hang below their prior highs.

I have been compressing my time frame more and more given the extreme crosscurrents we're seeing right now, and for the time being am happy to take advantage of whatever day-to-day opportunities come up, which we've seen a few times in the past week.

If the higher-beta sectors get in gear and follow through on today's reversal, then it would almost certainly pull the broader indices to new highs. The Russell 2000 has been particularly hard-hit, and one of the very few technical indicators I follow is flashing what has been a consistent buy signal.

The 3-day Relative Strength Index (RSI) on that index closed below 20 today, which is unusual to see while the 50-day average is rising, and it's even more unusual to see in December. If we buy when all three factors are present (1...oversold RSI, 2...rising 50-day average, and 3...during December) and hold for a week, since 1990 the trades showed 8 wining trades out of 8 attempts with an average return of +2.0%. The average maximum drawdown was only -0.3%, so if this is going to hold to the pattern, then we should see only very minimal downside from this point.

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

ApproachingTheBell

12/19/06 3:25 PM EST

The indices have had a decent run off the lows, with the S&P 500 up around 10 points off the morning gap.

This is about in line with the minimum moves seen from prior instances of our short-term models becoming extremely oversold, so once again we have no evidence that the intermediate-term trend is in imminent danger, despite the overall negative longer-term sentiment condition and potential emerging-market ripple effect.

Our short-term stuff is back to neutral or even slightly overbought in a couple of cases. With the S&P approaching its previous highs, I'm not sure how much more "oomph" is left in this oversold bounce, though I don't have any plans to short it unless our intraday guides cycle back to overbought while the indices are capped by their old highs.

LunchtimeLull

12/19/06 12:25 PM EST

With the bounce off the gap opening, our short-term guides have started to recover from the oversold extremes they reached late yesterday.

The STEM.MR model for the Nasdaq 100 hit a level that was as stretched as any over the past few months, with the only real comparison being the reading from November 27th and 28th. With the model beginning to curl back up now, and what should prove to be strong support just under current prices, we shouldn't see much more of a decline here if this is just another correction in the ongoing uptrend.

MidMorningOutlook

12/19/06 10:15 AM EST

Good Tuesday morning...Memories of 1997 begin to come forth as the debacle in Thailand shakes loose some of the "everything is great" attitude that has been so prevalent.

This situation is vastly different than 1997, however. That year, Thailand devalued its currency on July 2nd, and it didn't ripple through the U.S. equity markets until months later as the dominoes began to fall. This situation is more akin to taking a hammer upside the head, given the increased correlation among markets (and inexperienced hedge fund managers flush with money and searching for yield).

Not since the volatile bear market have we seen the indices gap down so large after suffering a relatively large down day yesterday during the month of December. Entering today, our short-term models were already extremely oversold, something that has resulted in nearly-immediate rallies over the past few months.

Last night's "external" development has thrown that pattern for a loop, so I'm watching carefully now to see if the December lows in the Nasdaq 100 are going to hold. I noted yesterday that a drop towards that support should be the ultimate setup for the bulls, and if they can't take advantage, then we have the first solid piece of evidence that we're in a different market environment. With the multitude of market-negative sentiment indications out there, that would increase the risk substantially for intermediate-term longs. So far that support is holding, and this morning's lows in the NDX will be my main focus.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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