Signs of a breakout and Santa Claus rally

Stocks opened higher yesterday, and although the highs were mostly made in the morning, the down did manage to gain 85-points and we saw solid gains of 1% or more in most of the indices.  Perhaps the Santa Claus rally has finally begun.

For the TSP, the C and S-funds were each up just over 1%, while the I-fund gained 0.23%; again being held up by a stronger dollar.  Bonds were down 0.45%. 
 
The S&P 500 is back near the top of the trading range, so we will see another attempt today to finally close above that range. 

                   
                  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Since the leaders, the Dow Transports and the Nasdaq, have already broken out, we're expecting the S&P 500 to follow suit. 

The Nasdaq's breakout this morning was epic.  OK, maybe epic is a little too much.  How about, quite clean?  It opened above the rising wedge and held the entire day.  If there was a negative, it was that volume was only average, but this is a holiday week so it might be light all week.  Friday's volume was very high because of the options expiration and because there was some rebalancing in the indices (stocks being replaced in the S&P 500 index so extra trades had to be made).

                   
                   Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

It will be interesting to see if the gap that was created yesterday morning, will be filled right away.  Most gaps do get filled sooner rather than later, but the fact that the Nasdaq would have to go back into the rising wedge to fill this gap, might make it a little less likely, but gaps do get filled.

The dollar's rally continued.  If you are in the I-fund you are feeling the effects of it this month for sure.  For December the C-fund is up 1.76%, the S-fund is up a whopping 5.8%, and the I-fund is actually down 0.56%.

                    
                   Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The move up has been parabolic and I don't think it can sustain that type of angle very long.  The question is, when there is a pullback, will it be as sharp as the ride up has been?  If it is, that will be the time to be in the I-fund.  It is not usually a good move to step in front of fast moving train, but with the dollar fast approaching the overhead 200-day EMA, this rally could finally face some resistance.

The NYSE ARMS Index had moved back down to 1.50 late last week giving us yet another buying opportunity - if you believe this indicator. 
            
                   Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

It has proven effective all year so maybe this one will give us that Santa Claus rally we have been waiting for.  It may have started yesterday.

As wonderful as that would be for the bulls, I am still very nervous about this market looking out past the end of this year, and I do want to lock in gains but I hate to do it this week.  I am fighting the fear vs. greed battle.  I fear that we are nearing a possible peak in this market as we have come so far so fast and there are signs over overvaluations, but the greed in me says, the technicals are good and we are in the best environment for stocks of the year, so hang in there.  OK, but not for long.

Thanks for reading.  We'll see you back here tomorrow.

Tom Crowley