Snapshot Notes - December 20, 2007

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THURSDAY, DECEMBER 20, 2007

Yet Another Reversal Spurs Bulls' Hopes

12/20/07 4:15 PM EST

As of:

SPX 1440

Sometimes we have situations where no matter what one wishes to think about where sentiment is at any given moment, there's some evidence available to trot out.

Today I read five different references to how investors were despondent heading into the end of the year, and six that contended that "everyone" was bullish (mostly due to seasonality).

Surely we could cherry-pick among the measures we follow and support either case. For the former we could cite the persistent pessimism among individual investors in the AAII sentiment survey, the new eight-year low of optimism in the latest State Street Investor Confidence index, or the major flight of capital from U.S. mutual funds.

Those trying to support the latter argument, that's there's too much optimism, could pull out a graph of folks writing about a Santa Claus rally (like this one), or the fact that there has been little evidence of traders betting heavily on a decline (such as few assets flowing into inverse mutual funds of ETFs on the S&P 500, or small options traders).

Instead of thinking up an outlook and then trying to find something to support it, I prefer to look at all the data I find reliable and then form probabilities around them. And right now, it's really difficult to side with either the bulls or the bears based on that evidence. Sentiment, as I see it, is a muddled mess on all time frames.

What I've been harping on since Tuesday are the large number of "oversold in December" stats that popped up with the selling pressure earlier this week, based on price action alone, and not any particular sentiment or breadth statistics. From a variety of viewpoints, the kind of pressure we saw then, during this time of year, has led to extremely consistent positive returns when holding through the first couple of sessions of the new year.

That has made me interested in buying dips along the way, with the thought that we should see prices recover, and then some, into the new year. But I have not at all been interested in trying to chase prices higher, and I'm still not. The outlook for the next week and a half looks promising, but price action has been flaccid, and until buyers have the will and ability to keep us propped up, I don't want to bet on momentum.

Today we once again got an afternoon reversal, once again it looks good on a chart, and once again it has gotten hopes up that the fat man in the red suit is on route with a bag full of presents for "brave" buyers. I'm willing to tag along with those entertaining such a fantasy, but I remain somewhat skittish because of the price action, and will continue to be so until we get a rally that doesn't fizzle as soon as it pops.

Have a great night and we'll see you tomorrow!

Whippy Trading and Mixed Sentiment

12/20/07 10:15 AM EST

As of:

SPX 1440

HELP ARCHIVE

Good Thursday morning...We begin the day with mixed trading in the major averages and broad market sectors, as traders try to sort out what to do with a gap up opening. There has been a lot of flux during the first 45 minutes of trading, with some very whippy moves, and given tomorrow's final option expiration of the year, we may be in store for more of the same for the rest of today's session.

I've noted often that about the last thing I ever want to see is a large gap up open in the direction I'm trading. When the open of regular trading deviates significantly from where we closed the last session, it's typically an indication of emotional trading, and those gaps most often trigger a move in the opposite direction when the "real" volume begins to flow at 9:30. We're seeing that yet again today, as the S&P 500 opened right at resistance, and we're getting the typical counter-reaction.

Over the past few days, we've gone over quite a few "oversold in December" types of statistics, which pointed solidly higher if holding through the first couple of sessions of the new year. Because of those and some oversold indications among our more sensitive guides, my plan has been to add to longs on dips.

Because this is still an exceedingly skittish market, however, I have had no interest in trying to chase prices higher after we've already rallied. That has been a recipe for losses, as we have just not seen any evidence yet that buyers are willing (and/or able) to sustain even the shortest-term of rallies. Today's gap failure is more confirmation of that.

Many of the sentiment tells that we watched are mixed at this point, or cancel each other out, and overall they're not giving us much support for a strong argument for one direction or the other. We have things like the Investor's Intelligence sentiment survey, which is showing that newsletter writers are excessively optimistic (and becoming more so), while the AAII survey is showing the opposite.

The latest State Street Investor Confidence survey showed its most pessimistic results in history (going back to 1999) but yet we're not seeing investors push money into funds that bet on a market decline. It all adds up to a very mixed message.

Yesterday's session didn't provide us with much in terms of resolving whether we're about to finally get going with the much-anticipated Santa Rally, or whether there's another dip ahead. Today's gap also isn't much help, so I'm making no changes here. I continue to like the odds of generally higher prices (if looking through the first couple sessions of next year), but I'm not at all a fan of how prices are acting here. I'm staying put with what I've got for now.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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