Snapshot Notes - October 3, 2007

As of:

SPX 1523

Today has been one topsy-turvy session as the morning rally has given way to even more forceful afternoon selling pressure, taking us to new intraday lows. In the process, a plethora of stocks and indices are carving out what look like classic reversal patterns.

A perfect example can be found in the IShares MSCI Emerging Markets Index, ticker EEM. After a big up day two days ago, and a churning, indecisive move to a new high yesterday, the fund looks about to erase all of the gains from two days ago.

That three-day pattern is a classic-looking topping pattern, but in doing some tests on it this afternoon, it quickly became obvious that one should not trade based on that pattern alone. It looks ugly on a chart, but the two other examples I can find over the past few years (11/16/04 and 1/25/07) led to solidly positive results when looking out over the next week.

Non-domestic markets may be forming a top here, but I wouldn't rely on the pattern we've seen over the past few days as the sole confirmation that they have. I also checked some of the various patterns we've seen in the major domestic indices the past few days and they were similarly inconclusive.

I mentioned this morning that while I'm starting to warm to the idea of a potential long in the Nasdaq 100 based on a potentially looming oversold signal in the STEM.MR Model for that index, I wasn't interested in chasing the morning rally in that index. Rather, I'd prefer to wait until we got a deeper pullback and hopefully a better indication of "excessive pessimism".

The NDX dropped about 25 points from its morning high, but that morning rally has screwed up the model, making it churn on the lower end of neutral instead of becoming oversold. There's a fine line between being patient (which is usually a good thing) and trying to be perfect (which is not), and perhaps I'm crossing that line into the latter, but I still think it's too soon to try a long on the NDX and so I'm holding off for now.

As of:

SPX 1523

HELP ARCHIVE

Good Wednesday morning...we begin the day with a brief dip in the major indices as semiconductor shares take a hit, but several other sectors have taken up the slack and the indices have started to recover from the initial flurry of sell orders.

Yesterday, we went over some themes related to the current market that were skewed to the negative side. Whether it was the (admittedly questionable) negative seasonality, or signs of excessive optimism from a few of our "dumb money" indicators, or even the out-performance of small-caps, all of what we looked at led to at least moderately negative performance going forward.

At the same time, the major indices have done nothing wrong since the mid-August low - they've followed through pretty much perfectly from how they should have given everything we looked at in August. And with the DJIA and NDX trading at new yearly highs, I didn't see sense in being negative enough to try shorting this market, even in the short-term.

The only way I would consider that is if we begin to see "false" breakouts in the indices, mostly involving an inability of the S&P 500 cash index to hold above 1540. If that index suffers a nasty drop below there then rallies meekly back up to it, then I may consider a short but we're a ways away from that possibility.

I continue to be more interested in finding ways to take high-probability bites out of the long side, which have been few and far between since the FOMC cut its target rate a couple of weeks ago. We may have something interesting shaping up soon, though, in that the STEM.MR Model for the Nasdaq 100 is approaching oversold territory.

This is unusual since the index has dropped only about 15 points from its high, but as I've often noted, the models are built so that oversold signals are easier to obtain in strong markets than weak ones. That allows us more opportunities to get in on healthy markets and less attempts at trying to pick the bottom in weak ones.

Even considering that aspect of the model, it's odd to see the model hinting at excessive pessimism readings with such a tiny pullback - most often the NDX has dropped at least 30 or 40 points from a high before seeing a reading like this. If the index keeps ripping higher from its morning low, I'm not going to chase it higher, but if we see some additional weakness in the coming day(s) that gets us to a buy signal in that index, then I'll be looking there for an opportunity to try another long-side trade.

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