Snapshot Notes - September 17, 2007

http://www.sentimentrader.com/subscriber/subscriber_home.php

MONDAY, SEPTEMBER 17, 2007

Nothing Doing as We Wait

09/17/07 5:00 PM EST

Since mid-week last week, it seemed a pretty good bet that the S&P 500 cash index would make at least a temporary stop in the 1480-1500 zone. There were a number of factors conspiring to hold equities back, and the risk/reward seemed inappropriate for short-term trades on the long side.

But despite some intraday dips later in the week, stocks held up well, and closed out the week near their highs. Today was a little different, though, with steady selling pressure through mid-morning and chop the rest of the day.

The chop should only get worse heading into tomorrow's decision. The usual pattern has been for mild buying pressure heading into late morning, then an extremely low-volume drift going into the decision. Then we get two or three volatile swings either way before a more trending move into the close.

I don't know how valid that pattern is going to be tomorrow, though, as there is a significant amount of uncertainty regarding the Fed's decision and the market's subsequent reaction.

Today's pressure was enough to push the STEM.MR Model slightly into "excessive pessimism" territory, but I'm not reading a whole lot into that, either. The immediate reaction to the Fed announcement will trump any technical, fundamental or sentiment signal and I would not be buying based on the mild oversold conditions.

Bottom line, the chop we're seeing heading into tomorrow afternoon is meaningless and we'll possibly see a week's worth of moves compressed into a couple of hours tomorrow. I will be completely flat (i.e. in cash) for trading positions going into the announcement, and possibly for a day after that as we get things sorted out. It should be a volatile week, and I don't want to get caught on the wrong side by taking a position for which I have little or no edge. Once we get that out of the way, we'll have brokerage firm earnings to look forward to, and hopefully a return to slightly more stable market movements.

Have a restful evening and we'll see you for tomorrow's drama.

Leave the Chop for Butchers and Ninjas

09/17/07 10:15 AM EST

Outlook:

Good Monday morning...we begin this important week with negative trading in the major indices and most broader market sectors. Today's trading, along with that of last week and tomorrow morning, is pretty much meaningless for everyone but the shortest-term of traders, as we should see swings tomorrow afternoon that dwarf whatever gains or losses are made prior to the Fed decision.

Over the weekend, I posted a longer-term comment that looked at the Fed's rate cut history over the past 35 years, showing the interaction between the Dow Jones Industrial Average, the US Dollar, Gold and the CRB Commodities Index.

On a shorter-term time frame, there was also some consistency. Stocks tended to jump the day of the Fed cut, with the S&P 500 surging an average of +1.5% and ending in positive territory 7 of the 8 times. Then there was most often some moderate pulling back in the days following the rate cut, before another push higher that caused the S&P to be higher one month later all 8 times by an average of +3.1%.

But that is looking at changes in the discount rate, and we've already shot our load on that. The Fed lowered the discount rate on August 17th, and in keeping with history the S&P rose that day. As we saw from the longer-term comment, if it keeps with historical precedent then we should see more gains to come.

The cut in the discount rate is a done deal, but most everyone is poo-poohing that and focusing instead on the fed funds rate. Based on the interaction between market rates and the Fed's target, it should be a lock that they will drop rates by at least 25 bps, but Chairman Bernanke seems to be a different kind of bird, and frankly I have no idea what he's actually going to do or say.

A cut that small, or no cut at all, seems as though it will send us down to challenge the mid-August lows. There is no doubt that that is consensus opinion, so perhaps it won't happen. I really have no edge there - it is little more than gambling - so I will be out of all trading positions ahead of Tuesday afternoon. We could easily swing 3% - 5% this week, and I don't want to get caught on the wrong side based on a hunch.

Since mid-week last week I've been on the negative side of neutral, thinking that the S&P 500 cash index would stall out between 1480-1500 based on a number of different factors. We got some negative intraday dips, but every time buyers stepped in. Today's gap hasn't been so easily recovered, and a move to new intraday lows later this morning should set us up for even more selling pressure during the rest of the day. But like I've been noting, I have little desire to try to trade this chop ahead of such a market-moving monster tomorrow, and will have my hands firmly planted under my arse.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.