Snapshot Notes - December 28, 2007

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FRIDAY, DECEMBER 28, 2007

Will Seasonality Override Oversold Conditions a Bit More?

12/28/07 3:10 PM EST

As of:

SPX 1483

This morning, we went over the idea that although some of our most sensitive indicators were heading into oversold territory, we have a bit of negative seasonality to deal with before the end of the year.

The last trading day of the year has been consistently negative for the past 15 years, showing a positive return only 27% of the time in the S&P 500 during that span. Other major indices showed similarly inglorious results for that day, though the small-cap Russell 2000 has held up relatively well.

Once we enter the new year, though, we'll start out with a bang, at least historically. The 2nd trading day of the year has traditionally been the day with the most consistently positive return, and also the one with the greatest average return, according to the Seasonality section of the site (see here). That doesn't mean it's a lock to be positive in 2008 of course, but it's a bit more of an edge if we have other reasons to expect stocks to rally.

The oversold condition among our short-term models is one reason for that. Since October, stocks haven't responded especially well to oversold signals in the models, but generally the broad equity indices have at least temporarily halted their decline when we get readings as stretched as the current ones. Combined with the seasonality to kick off the new year, I suspect that any additional selling pressure through Monday has a pretty good chance to be recovered during the first few sessions of the new year.

There are a bevy of potential reasons to expect technical support around 1460 - 1465 in the S&P 500 cash index, so if we would happen to decline to that approximate area into Monday, then I would look to more aggressively add to or establish long positions, with the idea that oversold conditions heading into a seasonally positive time of the year presents a good risk/reward situation.

Heading Towards Oversold Into the New Year

12/28/07 10:15 AM EST

As of:

SPX 1483

HELP ARCHIVE

Good Friday morning...We begin the final session of the week with a gap up opening that quickly failed. We have a mish-mash of sectors leading us to the downside, but like yesterday the "evil twins" of gold and oil are doing the best among the sectors I watch.

I've stated often that I rarely let seasonality dictate the terms of a trade. The vast majority of the time, seasonality is just a gentle breeze either with you or against you - it's nice to have in your favor, but it's almost never enough to base a trade on in and of itself.

The exceptions, those times when seasonality becomes a bigger factor, are the days immediately surrounding month-end, and holidays. When those two seasonal factors come into play at the same time, then it can have much more impact on my trading decisions.

We're approaching one of those times now, with the latter part of next week showing one of the most consistently positive days of the entire year (the 2nd trading day of the new year). Because of that, I've wanted to find a lower-risk opportunity to have some long exposure heading into that period.

Seeing some oversold readings heading into then would be just such a situation, and we're heading towards that now, at least according to the STEM.MR Models. Seeing some additional selling pressure today and even Monday should set us up nicely to see if the beginning-of-year seasonality will kick in again.

Today and tomorrow aren't particularly positive seasonality-wise, showing a positive return only 33% of the time over the past 15 years in the S&P 500. The last trading day of the year has been the worst offender, closing positively only 27% of the time and with an average return of -0.4%. The Nasdaq 100 wasn't much better, with a 33% success rate, though the small-cap Russell 2000 did hold up better with a 60% win rate.

Because of that, I'm in no special hurry to try to get invested ahead of the possible positive influence we may see to start the new year. I suspect we may see nothing but chop or some additional selling for the next couple of days, which should push our short-term guides firmly into oversold territory and set us up for a long trade after the New Years holiday.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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