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Last week the market pretty much ended the week where it started
as the S&P 500 closed on Friday down two points for the week. Gold though
continued its torrid rise despite more premature calls by various talking
heads and Wall Street experts for a major bottom in the dollar.
Once
again the opinions of the majority have been proven wrong.
In
fact on this weekend once again I cannot find a single person on the Internet
who is saying now is the time to buy stocks. Sure - there are people on
message boards that are, but I'm talking about writers and commentators. This
has been a trend for about a month now. And the more people that are down on
the market the harder it is for most people to buy - even to just hold on to
what they already have that is working for them.
The
fear from last year still remains. The average American lost about half of
their retirement account and that's a painful memory for most to overcome.
Yes, I do think eventually next year we'll see the market make an important
peak, but there is no sign of that happening now. Yes the number of stocks
leading the rally is narrowing, but there are enough going up to make some
nice money.
In
fact this week tends to historically be one of the best weeks of the year,
because the stock market almost always goes up the holiday shortened day
before Thanksgiving and continue higher the day after Thanksgiving too.
Going
back to 1983 the S&P 500 has tended to rally in the days leading into
Thanksgiving and continue higher until eight trading days later. After which
it would dip a little in the first part of December and then continue higher
until the end of the year.
Even
last year during the stock market meltdown the market managed to rally into
the Thanksgiving holiday and maintain an upward bias through December.
Now I
wouldn't base any decisions solely upon these facts. I always look at the
charts as my primary indicator.
Right
now the S&P 500 has support in the 1070-1075 area while it is overbought
on daily stochastics. Below that level it has support in the 1070 area. I am
fairly convinced that we'll see the market go higher on Wednesday and Friday
- the days between Thanksgiving.
So if
the market is going to go much lower it needs to do it today and tomorrow. It
really needs to do it today. It needs to sell this gap up and drop.
Even
on a chart you can see this, because if the market is going to fall much more
it needs to carry over the downside momentum we saw last Thursday and Friday.
If it just holds up then it will be in a position to simply drift sideways.
That would cause its daily bollinger bands(they are green in the chart above)
to come together and lead to a volatility breakout - one that would most
likely be to the upside.
Here
is the thing though - if the markets has an upside breakout from here it will
most likely spark a huge climatic blow-off top rally - a rally that will last
for weeks and send the market up another 10-20% by the middle of January.
I
know this might sound crazy to you. So many people are calling for big
declines right now and talking about how the valuation of stocks or lack of
growth in the economy doesn't justify current stock prices.
However,
if the market manages to just hold up here and then break to new highs it
will completely devastate the bears who think a major top is happening right
now.
They'll
be forced to cover.
More
importantly though all of the nervous nellies - the mutual fund managers,
hedge funds, and individual traders - who have been sitting on the sidelines
in fear of market tops will start to rush into to buy. The last thing an
institutional manager can do is not be invested in a rising market at the end
of the year. They rather LOSE money than miss out on something like that. So
they'll be forced to buy despite the lack of growth in the economy.
Upside
momentum will grow and lead to what would probably be a climatic rally that
would end around the start of January earnings season.
I've
drawn a projection of what such a possible rally would look like on the chart
above - trying to make it match seasonal patterns too.
Now
I'm not predicting this. I'm about 75% invested myself and will probably be
buying some new stocks this week, especially if the market dips a little in
the first part of this week, but I want you to be aware of this scenario.
And
know that if the S&P 500 manages to close above 1110 one day this week or
next and then follow through the next day it is likely exactly what is
happening. However, if the S&P 500 falls hard today and tomorrow and
closes below 1070 then a bigger correction is likely.
Making
money in the stock market isn't about making correct predictions, but in
identifying the long-term trend of the market - which is UP right now! - and
using investment strategies that are appropriate for it.
However,
as part of the process of keeping your pulse on the trend you need to draw
out different scenarios and see what kind of impact they would have if they
were to occur. In the position the market is in and so many people doubting
it an upside breakout at this time of year is a strong possibility we have to
be prepared for - that most people aren't considering at all.
Most
people don't think about the stock market this way. When the TV is bullish
they get bullish and when the talking heads get scared they get scared. Most
investors simply follow the herd.
Mike Swanson
Editor,
Wall Street Window
Disclaimer:
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