Snapshot Notes - September 26, 2007

This morning, I went over a couple of reasons why I thought it likely that the broader market could have a tougher time than I expected garnering some traction to the upside in the short-term.

It boiled down to the idea that technology has been the saving grace for the broader market during the past several sessions when other sectors were getting hammered to the downside. But that out-performance has led to overbought conditions in some of the tech indices like the Nasdaq 100, and that index has not done well during the supposed "window dressing" period to end the third quarter (it has shown a negative return 9 of the last 11 years in the final days of September).

Given the possibility of tech stalling out, and the idea that few other sectors seemed able to carry us higher, I doubted that a broader index like the S&P 500 would be able to sustain much headway.

Just as tech, and the rest of the market, was starting to roll over this afternoon, though, another white knight galloped to the rescue in the unlikely form of a crusty septuagenarian...I'm talking about Warren Buffet of course.

Rumors began to swirl this afternoon that the billionaire was close to buying 20% of Bear Stearns (BSC), which was enough to send those shares sailing higher, along with those of its peers. And, as it's wont to do, the broader market tailed along for the ride.

Rumors, realized or otherwise, of Buffet's moves are usually good for a pop in the target's share price, but that hasn't always worked out so well for those trying to tag along for the ride.

These buyout rumors tend to surface about once a month lately, so let's look at the prior two targets - Hovnanian and Burlington Northern Santa Fe.

We can see from the charts that both enjoyed a big spike when traders discovered that Buffet was buying the firms' shares, or was rumored to be doing so. But except for those who got out quickly, trying to buy into the enthusiasm was ill-advised. It's tough to make short-term trading decisions based on the movements of a long-term value investor.

Whether Mr. Buffet is actually buying any shares, I have no idea, and I presume that the stock would get another boost should the rumors be confirmed. He does have a history with buying into distressed financial firms, so it's feasible that he's up to his old tricks again.

In the meantime, though, I think it's a bad idea for us to hang any bullish opinions on the idea that the Oracle is going to ride to the rescue of the brokers or any other firm at the moment. And if the share prices of the brokers act like HOV or BNI did after their initial surges wore off, then it's not going to look so hot for the broader market.

We've been subjected to a continual game of sector hot potato in these final days of the month, and if tech can't get going due to poor seasonality and overbought conditions, and the brokers can't maintain the shot of Viagra administered by Mr. Buffet (both of which seem more likely than not), then the broader market should have trouble making much progress. I'm currently neutral in the short-term and don't see much of anything on the immediate horizon that has me interested either way.

It's been a pretty quiet day overall as the indices have spent a good deal of time both above and below their gap-opening prices.

I mentioned this morning that due to the overbought readings we were seeing in the Nasdaq 100, and its tendency to see poor performance in the waning days of September, I was questioning the likelihood that those shares could continue to hold up the broader market, something that it seemed like it has been doing the past few days.

The NDX has indeed begun to lag just a tad today, but in its stead we have the brokers coming on strong. Just in the past few minutes, the XBD broker/dealer index has shot higher, and that has helped to keep the broader indices afloat.

I don't like this whole sector-rotation game when trying to trade the major indices, as it's just a giant game of hot potato and we don't know when the next guy is going to drop the spud. The tough job of trading is made a little easier when we have more confluence among the sectors and for the most part they're in agreement - we don't have that luxury at the moment.

This morning, based on the idea that tech wouldn't be able to shoulder the burden much longer, and it seemed no other sector wanted to take the ball and run, I felt the risk/reward from either side of the coin wasn't very good, and I still feel that way. The concept of "window dressing" going into the final couple days of the month is a very inconsistent phenomenon and I think it's a relatively poor excuse for a trade, so for the moment I'm in neutral and waiting for a better setup than what I see right now.

Good Wednesday morning...we begin the day with some gains in the broader indices and most of the sectors I watch, though the pattern of the past few days is still relatively clear - positive technology, lagging consumer sectors.

I went over some seasonality-related stats over the past few days, mostly related to option expiration. Those convincingly suggested we should see some weakness this week, primarily concentrated very early in the week, but after that there wasn't a negative bias going forward.

There is a lot of talk now about quarter-end and how that will goose the tape higher. I always find those arguments dubious since they just are not very consistent. It's one of those things that when it happens and we see stocks rally into the end of the quarter, then everyone points to window-dressing...but when stocks fall instead, then everyone just kind of forgets about it.

Let's just check the facts and see how some various sectors performed during the quarter-end phenomenon, by buying the close four days before the end of September and holding until the end of the month.

Ticker	Sector	% Positive	Avg Return	Max Gain	Max Loss
SPY	S&P 500	58%	+0.1%	+1.5%	-1.3%
QQQQ	Nasdaq 100	25%	-0.8%	+1.8%	-2.7%
SMH	Semis	29%	-1.9%	+2.3%	-4.8%
XLB	Basic Materials	63%	+1.5%	+2.9%	-1.5%
XLE	Energy	88%	+1.5%	+3.0%	-1.3%
XLF	Financials	63%	+1.2%	+2.4%	-1.3%
XLI	Industrials	63%	+0.3%	+1.5%	-1.9%
XLP	Consumer Staples	63%	+0.6%	+1.9%	-1.3%
XLU	Utilities	88%	+1.6%	+2.5%	-0.9%
XLV	Health Care	63%	+0.4%	+1.4%	-1.4%
XLY	Consumer Discretionary	63%	-0.1%	+1.7%	-1.9%

The performance in the S&P was mixed, no better or worse than any other random time. There were some standouts among the others, though, notably Technology which didn't fare well at all. At the other end of the spectrum, Energy and Utilities have done very well during this particular time, both up 7 out of 8 years and with average maximum gains more than twice average drawdowns.

Given the poor historical performance in tech towards the end of this month and the overbought readings that are registering there now, I'm wondering how much more upside we're going to see in the short-term in some of those indices. And the troubling thing for the broader market is that technology has been the white knight over the past few sessions, one of the few shining stars that have helped offset some of the weakness seen in Retail, Housing and Financials.

If those other groups can't get it going to the upside (and they're lagging again this morning), and tech starts to struggle a bit more than it has (which looks likely given the possible negative seasonality and current overbought conditions), then I'm concerned about the S&P's potential here. We haven't gotten much of a lift off the re-test of 1500 (assuming yesterday morning was the re-test), but I'm going to pull back here and see how these various sector forces impact the S&P. I'm not particularly enamored of the risk/reward on either side so I'm moving back to neutral.

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