Snapshot Notes - August 4, 2008


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MONDAY, AUGUST 4, 2008

Can We Get Oversold Heading Into FOMC?

08/04/08 9:25 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Monday morning...We begin the new week with some mild selling pressure in the major indices. News flow was relatively quiet over the weekend, commodities are mostly pulling back, and foreign markets were mixed to slightly weak.

Last week, we ran into a situation where there wasn't all that much to talk about. We went over a couple of very short-term negatives based on our sentiment guides and the price patterns that had developed, but other than that there wasn't a whole lot that was new.

That hasn't changed much as we begin the new week. The latest weekly and monthly data that we follow, such as last week's small-trader options data and Commitments of Traders report, and the latest data on mutual fund cash levels, do not clear up our picture much.

The smallest of options traders, trading 10 contracts or less at a time, picked up their speculative call buying a bit last week, as it made up 35% of their total volume from 32% the prior week. However, protective put buying also increased a tad, to 22% of total volume from 20% the prior week. Both are well within neutral levels when looking over the past eight years of history.

The Commitments of Traders report, which covers positions in the futures markets as of last Tuesday, showed that large commercial hedgers in the major equity index contracts (both the full contracts and the e-minis) moved to a net short position of a nominal $5.2 billion. Small speculators (usually the "dumb money" when they move to an extreme) increased their net long position to $9.7 billion, up about 7% from the prior week, but that is still on the lower end of their range historically.

As I've mentioned repeatedly, I've downgraded the weight I place on the CoT data due to its recent tendency to be less reliable than in prior years, so it is not a major determinant in our models. Still, I'm a little bit encouraged by the continued pessimism displayed by small speculators as they hover around all-time lows in their net long position.

The latest mutual fund data showed that domestic equity funds increased their cash holdings from 4.3% of total assets to 4.5%. That is still pathetically low when compared to other readings over the past 50 or so years, but at least when we take interest rates into account and look at the Mutual Fund Cash Surplus / Deficit that we post to the site, it isn't nearly as bad as it was last year. I'm not reading much of anything into this data at the moment.

I mentioned last week that there were a couple of short-term negatives to end the week, including the price pattern and seasonality, which made me think that any gains wouldn't be sustained but it wasn't conclusive enough to make me want to bet aggressively on the short side. Entering this week, I'm still not seeing much on a short-term basis. Our most sensitive guides are neutral after working off their recent overbought conditions with the decline of the past two days. Another day of selling pressure today might be enough to get them to oversold, which might provide a decent short-term long side trade heading into the FOMC decision tomorrow, which has proven to have a smallish upside bias, at least until the afternoon announcement.

We typically see a mild upside bias heading into FOMC announcements, then two or three violent whipsaws which tend to erase the past several days' worth of movement. If there is a large directional move going into the close, then there is often an opportunity to "fade" that over the next several days. Bottom line, for now I'm not doing much of anything trading-wise and probably won't unless we see some oversold readings heading into tomorrow morning.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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