Christmas Rally?
Stocks
As stocks have pushed off their recent lows, one question prevails: Will Santa leave something nice under the market’s tree? Or will Wall Street’s stockings be full of coal?
Historically, we’ve had similar setups. This may be a Christmas rally – or it may not be. There are a couple of puzzling signals that tell me something might be missing. While the Dow and S&P have bounced enough to both register short-term Very Bullish trend signals, the Nasdaq and Russell 2000 are both lagging, as each still exhibits bearish trend signals.
In recent history, the techs and small caps have led the way in such bounces, so their relative weakness gives me pause. Yes, we are getting some long entries but until we get a confirmation from both of these markets of a bullish trend, we must at least remain cautious. Call me a skeptic, but I’ve seen this movie before.
Due to these divergences, I do not see a signal to buy this market. If a Christmas rally materializes, we will see follow through in all the indexes. At this point, the strength in the Dow and S&P appears to represent a flight to safety, as buyers cautiously return to the market.
On the bullish side, The Wizard is registering more long entries (Pre-Buys) than short entries (Pre-Sells). If this continues, we should get our Christmas Rally. Additionally, the S&P just registered its biggest weekly gain in over 30 years – all in the face of bad news and worse earnings.
On the bearish side, earnings are terrible and forecasts are worse. Every economic category conceivable seems to be showing significant weakness. And last week’s rallies were on light volume (not unexpected during Thanksgiving week.)
So where does the market go from here? Only the market knows that. If the rally does materialize, we will see changes to bullish trend signals in all of the indexes. if the rally fizzles, we’ll see that as well. But whether the market is naughty or nice, the Wizard has plenty of gifts for all of us.
Christmas 2007
Last year provides a good reference. As the calendars below show, the 2007 Christmas Rally boomed and fizzled, as the expected bounce quickly failed. From there the markets traded lower for the rest of their before falling sharply in January of this year.
(Click on image to enlarge)
(click on image to enlarge)
Short until I get a signal.
Using the Conservative Scan, most of The Wizard’s existing short positions have already taken profits twice, leaving only 25% of their initial positions on the table. However, if you’re holding positions that make you nervous, just go to cash and wait for a strong buy or sell signal. Remember, you don’t always have to be in the market. Staying out until you get a strong signal is a perfectly valid – and very intelligent – strategy.
ETF’s
For those of you who haven’t been following the ETF’s, they have done just as well as stocks these past several months. In other words, they’ve been exceptional. The market has been demolished across all sectors, and the Wizard has been short all of them.
Well, not all of them. We have been long the Inverse ETF’s. If you’re not familiar with these, Inverse ETF’s profit when the market or sector goes down. They’re ideal for IRA’s – which don’t allow short-selling – because all you have to do is buy Inverse ETF’s to profit from market selloffs. So while the Wizard was short most ETF’s, it was long the Inverse ETF’s. We made money playing both sides of the market.
Both traditional and inverse ETF’s are ideal for trading sectors without taking the risk of individual stocks. If you want diversified exposure in the simplest way, ETF’s are an ideal choice.
(click on image to enlarge)
SEMINAR
There are a couple seats left for the seminar in Carlsbad. If you want to learn how to use the Wizard inside and out while trading without fear, sign up today.
Have a good trading week, and I hope everyone had a terrific Thanksgiving. We all have a lot to be thankful for.
Gene Stunkel
Founder and Creator of the Wizard
