Saturday, December 23, 2006
Will Santa Call at Broad and Wall?
Pre-holiday doldrums found stocks slipping toward the bottom of their almost two-month-long trading range in the broad market on Friday. The market has indeed been making little net upside progress since the late October period as shown in the chart below:
http://marketclues.blogspot.com/
In fact, as you can see from the chart above, the broad market, as exemplified by the widely-followed and heavily-traded Russell 2000 Index, has made no net progress to the upside in the last 7 months.
Some of the more recent pricing pressure may have had something to do with the geomagnetic storm in mid-December -- investors usually decide to take profits after a geomagnetic storm and this last week certainly confirmed that phenomenon. But, some of the selling was undoubtedly due to investors with big gains cashing in their chips to pay for presents. In any case, the traditional Santa Claus Rally is due to hit next week, which should cheer up the crowd.
And the crowd has definitely gotten glum recently. From overly-bullish readings in early December, the crowd has decided that the outlook for stocks is really not as bright as they thought it was. After reaching an extreme on the 6th of December at more than 4 times as much money betting on the upside, OEX traders are now leaning to the bearish side of things. This is, of course, a very positive development because it means that the puts these traders are buying will help prevent the profitable decline they were intended for.
One of the strongest seasonals is traditionally the Santa Claus Rally which carries the market higher into the New Year. That rally is scheduled to start this coming week. It should be quite strong given the two-month basing pattern the market has constructed -- if it's a basing pattern, that is! We will discuss that subject, as well as some excellent risk-reward opportunities to profit in the weeks ahead in today's Notes, linked below
