Snapshot Notes - September 27, 2007

As of:

SPX 1523

During August, one of the sets of studies we went over was volatility, and how the current extremes in that respect most often resulted in firmly rising markets.

That's all well and good, but now we're dealing with something we haven't seen since early summer, and that's low-volatility conditions. Implied volatility has cratered since the uncertainty of the FOMC decision has passed, but more interesting are the intraday ranges being carved out by the major indices.

Earlier today, I went over the concept of NR7 days, which are days that have the narrowest intraday range (i.e. high minus low) of the past seven sessions. When combined with overbought conditions, those days tend to resolve to the downside as opposed to preceding a further launch upward.

In addition to that, the last day of the financial quarters have proved to be consistently weak for stocks, especially since 2002. Technology stocks have seemed to be especially prone to this kind of quarter-end letdown, and combined with the narrow-range day from today, I continue to think the tech indices will lag for just a bit longer.

After yesterday's gap up, it seemed as though our prospects in the short-term would be limited, but the broader indices have held up very well as other sectors have stepped up to the plate. They're giving very little opportunity for those who want in after last week's rate cut, which is a positive sign in the intermediate-term but makes things much more difficult for those taking shorter-term positions. For now, I don't see the kind of risk/reward scenario I want in order to have capital at risk for the short-term...that'll be tough to take if equities keep this creeping uptrend, but fear of under-performing is a poor excuse for a lack of discipline.

As of:

SPX 1523

HELP ARCHIVE

The indices have once again not traveled much from the opening gap, something that has been a hallmark of the past week. In the process, they're carving out exceptionally narrow intraday ranges, at least compared to their recent histories.

For example, the Nasdaq 100 trust, QQQQ, is currently working on a NR7 day. NR7 is a popular way of looking at comparative intraday ranges, and a day with that designation simply has the narrowest range (i.e. intraday high minus intraday low) of any of the past 7 trading sessions.

I've gone over narrow-range days quite a bit over the years, though we haven't had much opportunity to discuss them in recent months with the volatile markets. But all else being equal, these days tend to be more bearish than bullish, especially if markets are overbought at the time.

I checked the history of QQQQ for any day where the 3-day Relative Strength Index (RSI) was over 90% as it is now and QQQQ carved out a NR7 day. Over the next couple of trading sessions, it showed a positive return only 30% of the time (6 out of 20) and had an overall average return of -0.5%.

Combined with the fact that stocks, and tech in particular, have fared poorly the last day of the quarter, I'm still thinking that our upside is going to be somewhat capped here in the short-term and I'm not seeing much intriguing from either side of the coin. That will be exceedingly frustrating if the indices keep chugging higher, but I try to continually assess the risk/reward situation and that just doesn't seem very favorable for either short-term longs or shorts here.

As of:

SPX 1523

HELP ARCHIVE

Good Thursday morning...we begin the day with a positive open based on no real news that I can see. The game of hot potato among the sectors continues, as yesterday's hero, the brokers, are dropping to the bottom of today's scoreboard.

Yesterday morning, I began to become more concerned about the broader market's short-term potential upside due to the sector rotation that had propped us up the prior few days. Technology was the clear leader and few other sectors seemed willing or able to take its place - in fact, important groups like Retail, Housing and Financials were getting whacked.

By yesterday, we were seeing some extreme overbought readings in the Nasdaq 100, and when we combined that with the fact that tech has done quite poorly this time of year, I felt that the risk on the long side was starting to more closely resemble the probable reward.

Early in the afternoon, just as the indices were starting to roll over, rumors began to circulate that Warren Buffet was considering a large injection of cash into a major broker, which goosed not only that sector but the market as a whole. As I showed yesterday afternoon, though, recent Buffet rumors have not been that kind to short-term traders trying to hop on his back.

So with tech possibly in line for a rest, and the probable let-down in the brokers after the Buffet excitement, I wasn't too keen on our chances to make much headway here, and that's still the case.

As I mentioned yesterday, if we do get some upside, it will no doubt be credited to window-dressing, which is a poor excuse. There is very little evidence that stocks do well to end a quarter - since the bear market low in 2002, stocks have been down about 60% of the time on the last day of a quarter, and technology stocks have been down about 80% of the time, so if there is any window-dressing evident now (which is a very big "if"), then it will be out of the system by today. I have no trading positions on at the moment and don't see an immediate opportunity.

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