Will we remain in the trend or breakout?

The early January seasonal strength has not disappointed as we saw a solid follow through day yesterday.  So much for the inverted yield curve worries of last week.  The third trading day in January also has a positive bias, but not quite as much as the first two days and, if you look at the seasonality chart toward the bottom of this page, you'll the seasonality strength comes to an end on day four.

The so-called Santa Claus Rally tends to occur the last five trading days of the year and the first two of the next. Since 1959, the S&P 500 has risen during this period more than 75 percent of the time, with an average gain of 1 ½ percent. - ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT

If Santa Claus fails to call, the bears may come to Broad and Wall."

"Broad and Wall" is the intersection where the New York Stock Exchange is located. You can imagine my frustration as I tried to play the seasonal strength last week only to see stocks defy the Santa Claus rally trend.  Taking this as a sign of weakness I didn't want to be in stocks this week even though it is, as we mentioned, also seasonally strong.  That's the way it goes sometimes. 

I know we just went over another old trend failing when we saw the Dow end in negative territory in 2005 when a year ending "5" hadn't been negative in over 100 years.  But here is another old axiom:

"As goes January, so goes the year."  Meaning if January is good, the year usually ends higher.  If January is down, the year tends to end weak.  To take that one step further, you can also say, "As goes the first week in January, so goes January."  So if the first week in January is good, the year should end up good.

So far so good for 2006.  But that doesn't mean we won't get some bumps along the way.  Here's the trouble.  Over the past couple of years, breakouts have been a time to sell rather than buy.  I do expect a positive breakout this sometime this year from the recent two year consolidation, but maybe not just yet.  Here is what the market has done in the past few years when the market moves toward its upper trading range.  Here's the Dow during 2004 - 2005.


                              Chart provided courtesy of www.decisionpoint.com

It has been a better strategy to sell resistance and breakouts to the upside, and buy support and breakdowns on the downside.

The NYSE index has had a better trend in that it is moving upward, but still buying support and breakdowns has done better than buying resistance and breakouts.  We saw a pretty solid breakout this week in the NYSE index.  Is this the real deal or just another fake out?


                             Chart provided courtesy of www.decisionpoint.com

Here is one stat that actually makes me wonder if this is the breakout.  The latest AAII Investor Sentiment Survey came out last night and the results are quite surprising to me.

Those polled who said they are:  Bullish: 29%  Bearish: 40%

This was taken Wednesday.  The herd is bearish?  More people believe the market is going to go down after what we've seen the past two days?  How can that be?  This is the "dumb money."  That usually means higher prices for stocks.  Combine that with the "smart money" OEX options traders being very bullish, which we talked about yesterday (see yesterday's comments below) and you have to wonder:  Either that 40% bearish figure is a misprint or we may have to reconsider our short term bearish posture.  We may want to nibble on stocks again on any weakness over the next week.

The I fund has gone crazy the last few days with the help of a very weak dollar.  Now the dollar has fallen toward support...


                             Chart provided courtesy of www.decisionpoint.com

How much further can it go, and is this a time to hold on to your I fund gains?  At least until we see if the dollar is going to rally off of support?  Might be a good possibility but if you want to let it ride...

Bonds continue to do well but have gone relatively unnoticed compared to stocks.  The G fund looks to be ready to pay on Friday - possibly Monday after the surprising quick paying penny last Friday.  That was about 3 to 4 days earlier than usual.  With the current interest rates my loose calculation tells me we should see the penny gain about every 6.9 days. 

So I may be back to 100% bonds on Monday or Tuesday but that AAII sentiment survey certainly has me scratching my head and reconsidering stocks on any weakness.

That's all for today.  Currently 50% G, 50% F.   Thanks for reading.