Santa takes on some obstacles

Stocks were higher on Thursday, kicking off the official Santa Claus rally, but the S&P 500 has now been up five days in row and Santa is going to have to put it in higher gear to keep this overbought market moving higher this week.

For more on last week's action in the TSP funds, see the TSP Weekly Wrap-Up. 

Seasonality favors higher prices this week, but with light volume trading and some extreme readings in sentiment and overbought indicators, the market could be vulnerable to any bad news - ala the Dubai credit issue on the Friday following Thanksgiving, which saw a low volume sell-off to the tune of 150 Dow points. 
 
The S&P 500 broke through the 1083-1020 trading range last week, and closed at a new high for 2009 on Thursday.  Again, volume has dried up because of the holiday.  As I mentioned above, any bad news during a low volume trading period can cause some panic if there are no bids, just as we saw that on Friday 11/27.

                    

Although the trading range has broken to the upside, there is the small matter of the upper resistance line of the rising wedge. 


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

The good news is that the market leader Nasdaq Index, has already broken the wedge to the upside so if the S&P 500 can just play some follow the leader this week, we should be OK...

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

The NYSE showed some strength as the overbought/oversold indicator moved above the elusive +500 area.  That's the good news.  The bad news is that the NYSE is now fairly overbought.  Given the seasonality strength this week, I'd say we have a change to see +1000 on this indicator before we get a pullback.
                   
                   Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I also made note of the past two Decembers on the chart above.  We saw choppy, yet mostly positive action during the last two Decembers, but then things turned south in January in both 2008 and 2009.  Momentum is so strong right now, but I am concerned that we could see a similar formation start either some time this week, or next.  Both of the January sell-offs were sharp, but they did set up very good buying opportunities in the weeks / months ahead.

The 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.  Again, extreme readings vs. strong seasonality.

I'm going to be looking for an opportunity to sell some or all of my stock position this week.  I just won't know when exactly, until I see it.  This season's Santa Claus rally doesn't officially end until after January 5th.  If you recall, we noticed a pattern of the S&P 500 peaking when it gets about 115 points above the 200-day EMA, which is currently 1025.  Add 115 and I'm thinking 1140 would be a good target to consider selling if we see that number this week, or next.

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

Tom Crowley