Snapshot Notes - December 27, 2006

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WEDNESDAY, DECEMBER 27, 2006

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12/27/06 5:00 PM EST

Yesterday afternoon I wrote about the lack of a definable edge according to the measures that I follow - while the setup on Tuesday morning was absolutely perfect for the bulls (oversold with positive seasonality during a strong uptrend), there were valid reasons to question those very factors.

In hindsight, questioning that bullish setup seems absolutely boneheaded, but I'm convinced that over time taking an objective approach will prove more help than hindrance. In any event, I mentioned that we would likely get an overbought reading by today, and that we did in spades.

With the steady uptrend in most market sectors, our intraday guides became extremely stretched and the STEM.MR model hit a grossly overbought reading - tied for the most extreme in the past three years. The consistent pattern we've seen after other true extremes in that model is that while further short-term gains may be forthcoming, there is a high probability that those gains will be just that - short-term - and at some point we will be trading at a lower point than where we were when the model hit its extreme.

With the end of the year approaching quickly, we can get some very unusual and sudden moves in both directions. The general tendency is up, but again I am concerned about the fact that seasonality has been thrown for a loop over the past six months and I don't trust it much at this point.

I've been suggesting for the past couple of weeks that if the major indices were able to hold up into the end of the year, then I suspect we will see a volatile move lower in January (as happens more often than not), and I plan on betting on that scenario unfolding again to begin the new year.

With the extremes in our short-term guides, chasing the upside here is an exercise in one's belief that the traditional seasonal influences will hold sway over any other "normal" market forces. I'm not hopping on that train, and will simply have to lose out if further gains are to be had. I am more interested in looking for a pullback here and that interest will be intensified on a longer-term time frame once the first few days of the new year roll around.

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

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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