Snapshot Notes - December 24, 2007

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MONDAY, DECEMBER 24, 2007

Holiday Cheer Continues to Rub Off

12/24/07 10:00 AM EST

As of:

SPX 1483

Good Monday morning...We begin the holiday week with some spillover cheer from Friday's rare trend day to the upside. The foreign markets that were open showed good returns, the news flow has been light, volume is even lighter, and a lot of folks have simply stepped away to enjoy a long weekend.

We left off on Friday with a market that had finally responded as it "should" have to all the studies we had gone over earlier in the week. While it was dicey most of the week, with rallies unable to hold for more than a few hours, on Friday the bulls got a much-needed respite from the continual failures.

In doing so, though, we ran smack dab into a host of short-term overbought readings. Our shortest-term guides, including the STEM.MR Models, got pushed into "excessive optimism" territory for the first time since earlier this month, which led to a bit more choppy upside before a whack lower in the indices. Technically they won't give a sell signal until they begin to roll over from these overbought conditions, but historically it's been tough for equities to sustain much upside over the next few sessions when the models get this stretched.

In addition, the big move last week occurred during an option expiration. On Friday, I went over some of the stats surrounding previous big moves on those days, and they weren't all that cheery going forward. The S&P in particular showed a nasty habit of doing poorly in the days following up moves during expiration.

One influence that makes it tough to become too negative, of course, is seasonality, which is abnormally positive through the first couple of sessions of the new year. In the past, the overbought conditions and expiration hangover have trumped seasonality, so I don't want to rely on the calendar alone to make short-term trading decisions here.

Data released over the weekend was inconclusive. Small options traders, who never backed off too much from their optimistic trading during the recent move lower, have still not but it's getting a bit better. Last week they spent 39% of their volume buying speculative call options, and 20% buying protective puts. That's about neutral, and not showing too much of one emotion or the other.

Commercial hedgers (aka the "smart money") in index futures reduced their net longs by a large amount, going from $14 billion to $3 billion...but the fact is that they're still net long, which historically has led to positive equity returns more often than not. "Dumb money" small speculators remained about where they were, holding around $20 billion net long worth of S&P, NDX and DJIA futures contracts.

My thought on Friday afternoon was that perhaps we'll get enough of a low-volume jump to get the S&P 500 cash index to 1490ish, but given the overbought conditions and expiration effects, I didn't want to bet aggressively that we'd see a lot more sustained upside from Friday's close. We've seen a pretty good push this morning, and so far it's holding above 1490, which is impressive. I'm not convinced this is going to hold, however, and am mostly neutral position-wise at this point. I think we'll get another opportunity to trade the "oversold in December" phenomenon heading into the new year, but I'm not going to chase prices higher in anticipation of it.

I'll be traveling for the holiday later this morning, so this will likely be my last note until Wednesday morning. For those observing, have a safe and very Merry Christmas, and for those not - have a great day off!

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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