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Happy New Year! I hope you enjoyed your holiday week. 

Stocks ended 2009 with a thud, but in the end it turned out to be a great year for the market, to the surprise of many, considering how it started.  

The Dow closed down 120-points on Thursday, while the C-fund and S-fund each lost about 1%, but the late U.S. market sell-off spared the I-fund leaving it down just 0.08%.  The F-fund lost 0.18%.  For more on the weekly and monthly totals, see this week's TSP Weekly Wrap-up.

  

The late sell-off on Thursday took the S&P 500 right to the old closing high; the area it broke out of just two weeks ago.  This would be a good area for the S&P to fund support as two support lines converge near the 1115 area. 

If the S&P decides it needs to move lower, there is a small open gap at 1104, then come the bottom of the recent horizontal trading range near 1085.

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

The market leader Dow Transportation Index led the market higher in the first half of December, but last week it moved down appearing to want to test the old neckline of the large inverse head and shoulders pattern it had formed from September to November.  If technical analysis holds true to form, the neckline "should" hold.  If it doesn't, the technical picture will deteriorate and the bullish scenario will become more murky. 
                     
                    Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

There was a PMO crossover sell signal given last week on the Transports, so the bulls will want to see this reverse back up ASAP.

The other market leader, the Nasdaq, is in a similar situation.  It saw a breakout from a rising wedge and is now backing off and in the process of possibly testing the old resistance.  The technical picture looks fine here, and as you can see this chart starts in the bottom left and moves to the top right meaning the momentum is clearly bullish. 


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

I would not be looking to short this thing.  That would be the equivalent of stepping in front of a freight train, but we are seeing signs that the upward pressure may need to take a break.  It has been a great run, but we know markets don't go straight up forever.

The AAII Sentiment Survey hit a bulls to bears ratio of 2.14 to 1 last week and that is the first time that has happened since early 2008.  Prior to that it was October of 2007.  Those were not the greatest times to be invested in stocks.

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

A 2 to 1 ratio is relatively high compared to recent readings, but as you can see above (circled in blue) we have seen this survey hit ratios much higher - closer to 3 and 4 to 1 back in 2004 - 2005.  It actually hit 8 to 1 twice in the early 2000's.  So yes, 2 to 1 is high and may warrant caution, but if this bull market still has something left, it could take this ratio much higher before we see a peak. 

The question is, does the market have something left?  There are still a lot of concerns about the economy and the market will either continue to climb a "wall of worry", or we could start seeing some profit taking.

There were a lot of profits in 2009, but we are still a long way away from recouping the losses of 2008.  I also understand that there is a lot of money on the sidelines, and cash is the fuel for a rising stock market.  It makes me wonder if these investors who are wanting to put the money to work will allow the market to drop, or if they will continue to buy the dips as we have seen for the last nine months.

We start the new year with a lot of questions, and while I am not sure if it is the best approach right now, I am starting the year with a "show me" attitude.  I want to see what the market can do before I get back into an aggressive mode. 

Thanks for reading.  Best of luck in 2010, and we'll see you back here tomorrow.   

Tom Crowley