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Coolhand's Market Analysis

Seasonality vs. Sentiment

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Stocks have had a quite a run this year, with not much more than intermediate term weakness in between the up-legs. And as we head into the final two weeks or so of the trading year, seasonality is very positive. But has the bull run out of steam just as Santa is ready to make his appearance? Recent weakness and the inability of the indexes to get any traction to the upside suggest that might be the case. Especially given how bullish sentiment has been for a few weeks now.

Perhaps traders just want to see what the Fed has to say on Wednesday after the FOMC meeting comes to a close. After all, this is a Fed driven market. But there is also a lot interest in the Federal Reserve's very large Permanent Open Market Operation (POMO) operation on Thursday as the size of their bond buying operations will be much larger than usual at $6 to $7.5 billion. The Senate is also going to have a vote on the Fed Chair (Janet Yellen) next week. And then there's the budget deal debate in the Senate. That's next week too.

So it's going to be a busy week with potential market moving events on tap.

And I didn't even mention that Friday is quadruple witching expiration (quarterly expiration of individual stock and index futures options).

As I said, next week is seasonally very positive and sentiment so far remains quite bullish. As a bull, sentiment does make me uncomfortable right now. But the bears can't be too comfortable either. They've had trouble all year betting against this market. They may like the bullish sentiment, but seasonality has to make them nervous. So it will be an interesting week. Let's look at some charts.

Today-2013-top-50-trend-jpg

The Top 50 remains very bullish with a collective stock exposure of more than 95%.

Today-2013-total-tracker-trend-jpg

The Total Tracker shows more dip buying, which makes sense this time of year. Coupled with our bullishness, it could be problematic for the market too. I am anticipating it will bring some measure of weakness next week.

Today-spx-png

The S&P 500 is in a short term downtrend, but there still isn't much damage to the chart from a technical perspective. Yes, MACD and RSI point lower, but price remains well above the cloud and the conversion line (blue) remains above the base line (red) as well as both lines also being above the cloud. The lagging line (green) hasn't crossed through the conversion line yet either. These are bullish indicators, albeit weakening ones. But it is also possible that the chart is still in the early stages of a more pronounced decline. But there is room for more weakness without things falling apart. We need just enough to temper all the bullishness and then maybe the market finds its feet.

Today-efa-png

EFA (similar to the I fund) continues to slide. Price remains in the cloud, so the chart is neutral from that perspective, but the conversion line had a negative cross of the base line and that is bearish. And both lines are now crossing below the leading span A line, which is also bearish. Same for the lagging line (green) as it had a bearish cross through the conversion and base lines. MACD and RSI continue to point lower as well. It’s not ugly yet because the deterioration has been gradual and controlled, but if price breaks below the cloud, that could be longer term bearish.

Today-emw-png

Price broke below the rising wedge last week, which is bearish. But the 50 day moving average is so far acting as support. Since price had been trading in a narrow range, I don’t want to read too much into the bearish break of the trend line. At least not yet. The upside does appear limited as the converging support and resistance lines show. And that rising support line will become resistance if price can’t close above it next week. And even if it manages to do that, it needs to break above resistance as well, which isn't far above. Next week is historically bullish for stocks. If we rally next week, then a lot should turn back up. But if we get more downside action next week, I would hope that sentiment gets less bullish so the market has a chance to firm up and recover. If not, the market could see a more significant decline.

To see this week's full analysis, follow this link TSP Talk Members' Home Page

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Updated 12-16-2013 at 01:06 PM by coolhand

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