Snapshot Notes - December 28, 2006

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THURSDAY, DECEMBER 28, 2006

PostCloseSummary

12/28/06 5:00 PM EST

As we count the ticks 'til the final closing bell of the year, enough traders have been hanging around to make an interesting go of things.

By yesterday afternoon, all of our short-term indicators had reached nosebleed territory. It's a fairly rare phenomenon to see all of them line up at an extreme at the same time since many of them measure different aspects of the market.

That kind of confluence was enough to push the STEM.MR model to a three-year record overbought reading, and even during the strong uptrend of the past few months, those kinds of readings have preceded a time where equities might make a little more headway over the next few days, but in nearly every instance those gains (if any) were given back within a week.

While we're subject to a fair number of crosscurrents now with the approaching New Year, and as we saw today automatic program trades can have a larger-than-normal impact in a thin tape, but generally I'm expecting to see the same thing happen this time around. Meaning, any short-term spikes due to year-end or New Year adjustments should be given back shortly.

That thought is reinforced by the negative intermediate-term sentiment condition and the current divergence between the S&P 500 and Nasdaq 100 (which does not have a bullish history as shown in this comment from 2005).

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

ApproachingTheBell

12/28/06 3:25 PM EST

Stocks have rebounded modestly off the morning lows as there have been a slew of buy programs coming in during the afternoon session.

I've been asked frequently how I know whether it is programs or just natural buying, and the answer is that I don't know for sure. But these large, automatic orders make up 25% - 30% of daily volume, and they often leave their footprint on the NYSE TICK.

That indicator will spike from 0 to +1000 in a matter of seconds when a program hits since it goes out and buys a large basket of stocks all at once. This impact may be felt less and less as algorithmic trading (the breaking up of large orders into small bits) becomes more of a force, but for now we can clearly when the tape is being guided by program trades.

In a thin pre-holiday tape, that makes it hard to read "natural" market movements, and is the main reason I noted earlier that I don't like the idea of pressing any bets here. With the extremes seen in all of our shortest-term indicators yesterday, I would normally expect to see several days of flat or declining prices, but with year-end machinations and programs exerting such an influence, trying to game short-term movements is even more challenging than usual.

LunchtimeLull

12/28/06 12:25 PM EST

The major indices have conformed to the "severely short-term overbought within an uptrend" pattern that they've exhibited for the past several months by consolidating their recent gains.

I wasn't quite sure what to expect given the looming closing of the books, and I'm not sure if this kind of trading will hold into the close or not. I'm trading it how I normally would given the readings we got yesterday afternoon, but I don't like the idea of pressing any bets too aggressively here.

MidMorningOutlook

12/28/06 10:15 AM EST

Good Thursday morning...We have a volatile start to the day as traders respond to economic reports and the looming end of the year.

Almost all "window dressing" should have already been completed due to the length of time it takes to settle trades, but we can still see some wacky moves in the days immediately surrounding the end of a calendar year. The possibility of President Ford's funeral ceremony interrupting the normal pattern is one more uncertainty traders have to deal with before closing up shop for 2006.

As noted yesterday, our short-term guides became grossly overbought by yesterday's close. The STEM.MR model has hit its most extreme level of the past few years, something that typically results in choppy consolidation action (at best) when it occurs in the context of a strong longer-term uptrend.

I'm not sure what to expect today, quite frankly. Normally I would look for a low-volume day with a slight negative bias due to the short-term readings in our intraday indicators, and that's generally what I'm going to look for, but I'm taking it easy due to the possibility of whippy action to end the year.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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