Good technicals vs. some extremes

Stocks were lackluster most of the day yesterday, but in the end the indices managed to close higher.  The Dow was up a point or two, but once again the strength came from the small caps.  The I-fund finally showed some strength as well, after the dollar pulled back.

For the TSP, the I-fund led the way with a 0.91% gain, the S-fund was next with a 0.82% gain, and the C-fund picked up 0.25%.  Bonds were down 0.02%. 
 
The S&P 500 is at the top of, or above, the 1083-1020 trading range, but the difference is it has now made two consecutive closing new highs.  This could be considered a breakout but because of the holiday trading, there is no volume behind it.

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

Technically, you have to like what you see, but there are a few concerns that will be battling those technicals in the short-term. 

The Dow Transportation Index was up yesterday, which is good news since it did not participate in Tuesday's rally.  But yesterday's 0.44% gave it a new closing high for 2009.  The Nasdaq also climbed to another new high.  So, the S&P 500, which is a "follower" index, has now also made a new closing high.  The leaders are still moving ahead so perhaps the rally in the S&P 500 has more room to run.

The I-fund finally had a decent day yesterday as the dollar did back off of the 200-day EMA as we suspected it might.  It is still above the parabolic rising trend line that likely will not last too much longer, although that doesn't mean the trend will begin to be down.  It just means it can not sustain the current ascending angle.   

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

A pullback will simply create a base in which to form some support.  Right now the nearest support (beside the parabolic trend) is between 76.5 and 76.8.

As I mentioned yesterday, the VIX is now below 20.0.  That is not excessively low historically, but it could be a concern since it is quite a low reading for this year.  There is definitely complacency out there, but many of us (including me) are a little worried that this rally can run out of steam at any time.  Markets do like to climb a wall of worry so... you never know.  The are warning signs, and we'll get to them in a second, but right now the market is going up, the trend is higher, the seasonality is as strong as it gets, and the bulls are making money.  What's not to like?

The Smart Money / Dumb Money Confidence Indicator on SentimenTrader.com is back in the dark place.  The Smart money is below 40 (33) and the Dumb Money is above 60 (67).  Combined, this is a warning sign. 

                                
                               Charts provided courtesy of www.sentimentrader.com

This isn't an instant gratification indicator, but it is a sign that caution may be warranted.

Our TSP Talk Sentiment Survey came in at 66% bulls, 20% bears for a 3.30 to 1 bulls to bears ratio.  That's 4-weeks in a row above 2 to 1 and the first time it has hit 3 to 1 since December of 2007.  That is a big warning sign itself, but again we are also facing the strongest week of the year historically. 

The December charts posted down below show that each day of the last week in December is on average up between about 60% and 70% of the time.  That is great, but that means 30% to 40% of the time they are down, so don't be overly surprised to see red next week,  It could happen.

My original plan was to sell on the Monday after Christmas but for various reasons, I am wavering. I will play it by ear.

Have a very Merry Christmas and enjoy your holiday weekend.  I'll be back here on Monday morning weighing the possibilities that lay before us.

Tom Crowley
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Here is some holiday seasonality information... 
  

... and here is the December chart.  There is nothing but green ahead until the end of the month.

                        Charts provided courtesy of www.sentimentrader.com

Even last year, one of the worst years for the stock market ever, the S&P 500 was up 3.63% in the last 6-trading days of December.  The last 7-days were up just 1.73% because of a 1.83% loss on December 22, 2008.



The first few days of January also have a positive bias, but it is less reliable.  The S&P 500 was down 8.4% last January, but was up 3.16% on January 2, the first trading day in 2009.  January can be dangerous and I am a little worried about January 2010.

Here is a history of the final two trading days in December and the first three in January for the last 13-years.