Snapshot Notes - September 14, 2007

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FRIDAY, SEPTEMBER 14, 2007

Meaningless Drift Ahead of Next Week's Ultimatum

09/14/07 5:00 PM EST

Coming into this week, stocks had been under pressure and were giving a multitude of short-term oversold signals. After a few more hours of selling, those indications of excessive pessimism did their thing and buyers finally stepped in.

By Tuesday afternoon, the same measures that were suggesting we had gone too far, too fast on the downside had reversed and were now telling us the opposite. When we combined those overbought signals with the uncertainty surrounding the looming FOMC meeting, the negative seasonality during this part of September, and the lightened (Jewish) holiday volume, it seemed most sensible to expect the S&P 500 to top out in the 1480 - 1500 range that had pinned the previous two rally attempts.

Since then, stocks have hung in there better than I thought they would, but we haven't really gone much of anywhere. It's been several days of chop, and it seems evident that traders are exercising some rational thought and not committing capital ahead of the most widely-anticipated Fed meeting in recent memory. On a normal FOMC decision day, the major indices will often wipe away several days' worth of gains or losses within the first half-hour after the decision - next week could be even more dramatic.

Because of that, it doesn't make much sense to commit capital ourselves, either, and I'm doing very little trading-wise. There is no question that I will be going into Tuesday afternoon flat, and I don't see a big edge either way prior to that. If I had to choose, I'd give a tip of my cap to the short side given the factors listed in the second paragraph of this note, but again the potential reward doesn't seem worth the risk for what would have to be a very short-term trade.

The latest Commitments of Traders report, released late this afternoon and covering positions as of this past Tuesday, showed the same thing it has shown for months now - "smart money" commercial hedgers adding to their record net-long position (now up to $41 billion), and "dumb money" small speculators becoming less net long themselves (now down to $9 billion). Assuming the data is not corrupted by swaps or other Wall Street esoterica (which is becoming a bigger assumption every week), this would continue to bode well for the intermediate-term outlook for equities.

Have a safe and relaxing weekend and we'll see you next week!

Traders Realize Futility of Committing Capital

09/14/07 3:10 PM EST

Outlook:

It's been a quiet, whippy day as traders toss positions back and forth. Most everyone realizes that whatever move equities make now simply won't matter early Tuesday afternoon, as we could (and probably will) see a week's worth of gains and losses erased within minutes of the FOMC decision.

So unless one has a very short-term time frame, it's best to stay away and not get chopped up. Many short-term traders crave action in order to feel like they've done something, but at times like this sitting on one's hands it usually the best course of (in)action.

Since mid-week, I've felt that the S&P 500 cash index would be capped by this 1480-1500 zone for a variety of reasons, and I don't see anything today that would change that. Our short-term model for that index is actually dropping towards oversold, but again Tuesday's meeting will override any technical or sentiment readings, so I have no intention of acting on it even if it does cycle into "excessive pessimism" territory.

Hard to Be Aggressive Ahead of the Great Unknown

09/14/07 10:15 AM EST

Outlook:

Good Friday morning...we begin the day with a large gap down open in the major indices and mostly negative sector activity. The sectors I watch are being held back the most by semiconductors. The tracking fund for that group, SMH, is currently sitting on the widely-watched 37 area, and a violation of that later this morning should derail any attempt in the Nasdaq 100 to crawl back from its gap open.

For the past couple of days, I've been going over the idea that a move in the S&P 500 cash index into the 1480 - 1500 area should see the index stall out. The reasons were moderately overbought short-term conditions, weak seasonality during this part of September, and the tendency to see prices back off after having already rallied when approaching an FOMC decision. Most of all, though, it seemed unlikely that buyers (or sellers, for that matter) would want to commit substantial capital ahead of one of the most uncertain Fed meetings in recent memory.

The indices held up well yesterday in spite of those potential negatives, but all of those gains were erased with this morning's open. We're seeing the indices trying to crawl back after the opening gap, but I think we're still going to be in store for whippy, drifty action ahead of next Tuesday, and I don't think the S&P will be able to break away to the upside from this 1480-1500 zone, so the risk/reward on the long side seems more tipped to the "risk" side.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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