Snapshot Notes - September 13, 2007

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THURSDAY, SEPTEMBER 13, 2007

Carried by Holiday Volume into Resistance Zone

09/13/07 5:00 PM EST

For the past few days, I've been relying on the idea that given the great uncertainty surrounding next week's FOMC meeting (and the even greater implications it may have for the short-term), the seasonal weakness we so often see during the middle of September, and the mild overbought readings we've been seeing, that the S&P 500 would likely stall out in the 1480 - 1500 area.

It bumped up against 1480 yesterday before being rejected, but was able to poke into that zone today and hold for most of the day before a late bout of selling pressure. I think this is the kind of thing we should expect to see until next Tuesday afternoon, as traders play hot potato with each other pending the FOMC decision.

I've been asked a lot about what it may mean that equities are rallying like this, when there's still a few days to go before the FOMC meeting. Over the past decade, there have been 10 other times that the S&P 500 has rallied 2% or more in the three days leading up to the three days before the meeting. Buying then and holding until the day before the meeting resulted in 4 positive trades and an overall average return of -0.4%. With the exception of March 2003, the winning trades were very small, averaging +0.6%, while the losers averaged -1.7%.

Also, while the Fed decision will interrupt this, the next week has been one of the more seasonally weak. Buying the open of the 9th trading day in September and holding for a week resulted in only 4 winning trades in the last 12 years in SPY, and 2 of 8 in QQQQ.

The next few days are likely to have continued low volume, choppy trading and whippy moves as traders await next week, which makes it tough for anyone except those with a very short time frame. I don't particularly like the risk/reward from either side of the coin here, but that's particularly so for short-term longs. If we see anything other than a big gap down opening tomorrow, I'll likely be putting out a small short position.

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

Holiday Volume Lifts Us Into Resistance

09/13/07 3:20 PM EST

Outlook:

With fairly rare exception, NYSE volume dips 5% - 10% below average on Rosh Hashanah holidays, and it looks like today will fall in line with that, as the trading pace has been sluggish.

Sluggish, yes, but for those holding long positions it has been sweet. The S&P 500 and DJIA enjoyed steady trends higher through the early afternoon before suffering a bit of chop over the past hour, but the indices are still protecting their gains. This is more upside than I thought we'd see here, though the S&P is still in the 1480-1500 area that I've been thinking would stall this part of the advance.

The rally hasn't been accompanied by much enthusiasm - our short-term models have barely moved all day. With a gain like we've seen in the bigger indices today, we'd usually see the models head towards overbought, not flatline like they have.

I recently touched on the idea of divergences between the models and prices, and it's something that I may consider more than I have in the past. These things don't always lend themselves too well to historical testing, but preliminary results show that positive divergences (i.e. the market hits a lower low but the model does not) are more predictive than negative ones (i.e. the market makes a higher high but the model does not).

In any event, I'm sticking with the idea that we're not going to see a meaningful run higher above resistance given the factors I outlined this morning, so I continue to think that the S&P 500 will stall out in this 1480-1500 zone and not make any sustained progress at least until after Tuesday.

Conflicting Trend Filters Add to Confusion

09/13/07 10:10 AM EST

Outlook:

Good Thursday morning...we begin the day with mostly positive performance in the major indices, with the exception of the small-cap Russell 2000 which continues to act as the caboose to the index train. Banks, brokers and retail are among the sector leaders. Typically, the best situations from the long side come when those sectors are doing well, and risk-taking indices like the Russell 2000 and Nasdaq 100 are leading the others, so today so far is kind of a mixed bag in that sense.

It's obvious that the broader equity market is stuck in a transitional phase, struggling to emerge from severe oversold conditions while still clinging to its multi-year uptrend. One of the by-products of the recent movement has been that the long-term trend is rising (the 200-day moving average is up-sloping) while the intermediate-term trend is still down (the 50-day average is down-sloping).

This has pinched prices between two conflicting trend filters, which helps to confuse matters. I don't use the level of the 50- and 200-day averages as support and resistance areas - they fail far too often - but in my experience the slopes of those averages are among the best ways to define the intermediate- and long-term trend (as is the slope of the 20-day average for shorter-term periods). There are many elaborate ways to try to define "trend", but sometimes the simple solution is among the best.

I've mentioned before that one of the few common technical indicators I watch is a 3-period Relative Strength Index (RSI), which can be found on any standard charting software. That indicator for the S&P 500 cash index hit a mild overbought condition as well, with a reading over 70.

I checked for any time we've had this kind of setup in the S&P 500 tracking fund, SPY, since its inception in 1995. Specifically, I looked for times when the 3-day RSI was over 70, while the 50-day simple moving average was moving down and the 200-day average was heading up.

Looking out over the next few days, there was a slight negative tone. SPY showed a positive three-day return 45% of the time (out of 59 occurrences) with an average return of -0.2%. The most that prices went against us during those next few sessions was -1.4% on average, while the most it rallied on average was +1.1%. That's not a huge edge by any means, but compared to random 3-day returns during the study period, it is significantly weak ("significant" in the statistical sense).

I've been mentioning the past couple of days that I would be more interested in selling than buying if the S&P 500 cash index made it up to the 1480-1500 zone, particularly since our more sensitive indicators were indicating "excessive optimism". The S&P very briefly kissed 1480ish yesterday before being rejected, but this morning's strength has taken us there again. With the impending FOMC decision, mildly weak seasonality, and the moderate overbought conditions, I still think the risk/reward on the long side here is pretty poor. I don't see anything that suggests the market is a screaming short, but I don't have much interest in trying to chase short-term longs.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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