Snapshot Notes - December 22, 2006

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FRIDAY, DECEMBER 22, 2006

PostCloseSummary

12/22/06 5:00 PM EST

The last trading day before the holiday break limped to the finish line as a closed bond market and steadily declining volume left pretty much everyone uninspired.

The morning session was much more lively, however, as the major indices sliced through widely-watch support levels. The areas I was keying off in the S&P 500 and Nasdaq 100 proved to be nothing but a temporary rest stop as selling pressure overwhelmed the small bounce those indexes managed after dropping to support.

I showed a chart of the STEM.MR model for the NDX yesterday afternoon, and it was clear that each move towards oversold lead to a nearly immediate 20-point rise in the NDX. That has been the pattern not only for the past month, but the past five months - until today. This was the first real evidence we have seen since August that waning momentum and lousy sentiment conditions may be having an impact on prices.

When a market cannot rally off short-term oversold conditions, that's a big hint that buyers are not interested in stepping in at every opportunity. And when buyers sidestep their opportunities, then that leaves us open to further trouble, and today was certainly a warning shot. Given the status of the Smart / Dumb Money Confidence, a lack of buying interest can cause a situation like we saw last May.

I've now become more interested in fading rally attempts from here. I would become particularly interested if our short-term measures lined up in "excessive optimism" territory next week. We can sometimes get a strong pop higher to begin the new year, but even if that occurred it should be only temporary in nature. The NDX has suffered at least a 5% drop within a 10-day window in 17 out of the past 20 years, and I don't think 2007 will be any different.

Have a safe, long holiday weekend...and for those celebrating, have a very Merry Christmas!

ApproachingTheBell

12/22/06 3:25 PM EST

With the bond market closed and equity traders heading for the exits en masse, volume has drifted off and price movement this afternoon will mean next to nothing in terms of serving as a tell for next week.

The upcoming holiday-shortened week tends to have a positive drift, but seasonality has been so unpredictable this year that it is not really a part of my decision-making at this point. I'm more concerned about where the indices are in terms of their trend, and how they are reacting off our indicator extremes.

With many of them hovering at or near oversold, I'm not excited about the short side, though as noted earlier, the long side has to be questioned due to today's violation of what should have been support and lack of a bounce off oversold conditions. This is still a no-man's-land kind of market and I'm waiting for a better setup, of which there should be at least one next week.

LunchtimeLull

12/22/06 12:25 PM EST

In this morning's note, we were looking at the S&P 500 and Nasdaq 100, which had declined to the levels we have been watching for a few days now - 1415 and 1760, respectively.

Given where our short-term models were, the expectation - if the healthy uptrend was still fully intact - was a bounce off those support areas. We did get a meager attempt, but both indexes have since rolled over and scored new intraday lows.

This is not something we have seen in the past four months. Even during the past month, as the NDX has struggled, it bounced at least 20 points after other short-term oversold readings. We have received nothing of the sort this time around, and combined with the violation of the past month's lows (and awful sentiment condition), this is a shot across the bow for the intermediate-term and even in the short-term, in spite of where our intraday models are, I'm not in much of a mood to try buying into this failure.

MidMorningOutlook

12/22/06 10:15 AM EST

Good Friday morning...Yesterday I showed a chart in the Post Close Summary of the STEM.MR model for the Nasdaq 100.

That chart showed that the model had become oversold and had started to curl back up - something that has resulted in at least a 20-point rise in the NDX over the following day or two. That has been the pattern over the past five months, and had continued during December.

Each time we have been getting these oversold readings lately, I've been noting that we should watch carefully for signs of "it's different this time", i.e. looking for evidence that we're not going to get a rally like we have previously. Unless we make a quick recovery this morning, the selling pressure we're getting today will be the first real sign that waning momentum and the overwhelmingly negative sentiment condition is having an impact on prices.

The day before the Christmas holiday has been one of the most consistently positive market days historically, and in keeping with the theme of the past six months or so, we should apparently take that as a contrary indicator. Seasonality has been of questionable use (to be kind) over the past half-year, and I've been weighting it less and less in my trading decisions.

My focus has been on the 1415 area on the S&P 500 and 1760 in the NDX, and both indexes are flirting with those levels as I type. If the NDX can quickly regain that area, given the current oversold short-term readings we have, then I would be more inclined to look for generally rising prices going into the weekend. If not, though, I have no desire to try the long side.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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