Snapshot Notes - December 21, 2006

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THURSDAY, DECEMBER 21, 2006

PostCloseSummary

12/21/06 5:00 PM EST

Coming into today, one of the factors (besides seasonality) that gave hope for a continued rise was the possibility of gains in small-cap stocks, which typically precludes the broader market from taking a big hit.

The Russell 2000 index of small-caps has lead the market over the past couple of days, though after this afternoon's Philly Fed survey, it began to slip. In addition, the S&P 500 and Nasdaq 100 both declined to the levels that I noted earlier I was watching - 1415 in the S&P and 1760 in the NDX.

We also got a moderate level of oversold readings among our short-term guides - enough to push the STEM.MR model for the NDX to its lower trading band. The chart below shows the other instances of this happening over the past month, along with the rise in the NDX over the next 1-2 days.

Each time, the oversold reading lead to at least a 20 point pop in the NDX soon thereafter. With that index sitting right on what should prove to be support, I'll be watching to see if we get another ~20 point rise off this condition. If not, then we'll have a good idea that the momentum has weakened enough to effect price.

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

ApproachingTheBell

12/21/06 3:25 PM EST

In an earlier note, I mentioned that I was watching 1415 in the S&P 500 and 1760 in the Nasdaq 100 as important areas to watch.

Both indices declined to precisely those levels this afternoon before bouncing. Our short-term guides had become modestly oversold in the meantime, giving us another test of the idea that this is just another mild correction in the ongoing bull phase from July.

Small-caps have been slipping from their earlier leadership spot and the bounce so far has been anemic, so it's too early to say we're out of the woods just yet. I remained fixated on those support zones.

LunchtimeLull

12/21/06 12:25 PM EST

A surprisingly bad Philly Fed survey spiked the major indices down and we're continuing to see selling pressure since.

The Russell 2000 is still green on the day, and I'm not going to be too worried about a more substantial pullback unless the S&P 500 fails to hold 1415ish and the Nasdaq 100 takes out the widely-watched 1760 area. Unless that happens, I'm going to assume that this is another in the long line of natural short-term corrections we've seen and not the beginning of the intermediate-term drop that so many of our sentiment guides are screaming for.

MidMorningOutlook

12/21/06 10:15 AM EST

Good Thursday morning...Small-cap stocks are leading the charge again this morning, continuing the pattern of their historical performance after becoming oversold in December.

If traders keep up their willingness to put money to work in these higher-risk issues, then it suggests the "safer" broader market is unlikely to sustain a major bruising just yet. This has been a short-term pattern and doesn't say how things might play out once the new year begins, but until then it's one factor making me less willing to try to bet against equities.

Given the conflict between those potential positives (i.e. bouncing small caps and good seasonality) versus the overwhelmingly negative sentiment condition (and lagging Nasdaq 100), my strategy has been to step back and wait for good short-term opportunities on either side of the market. We've gotten a few of those over the past week, and I think we'll get at least one more before the year is out, but I'm not seeing it now. We're no doubt in for more days of tight-range, low-volume, listless trading, but at some point we should get an intraday extreme or two. Until then, I'm standing aside.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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