With two consecutive down weeks behind us, and a long holiday weekend ahead, the market will be seeking fresh catalysts to drive the trading action. GDP is released on Tuesday, and then a long slew of economic reports are concentrated on Wednesday morn. All of these can move the markets, and as such are at the top of our watch list.
By Friday, the rookies will be manning the terminals, as Wall Street fields a skeletal staff. Expect the volume to decrease as the week progresses. The lower volume – and less experienced traders – is what makes the holiday markets relatively easy to push around – especially this Friday. It is part of the reason why seasonal patterns near Thanksgiving have been mostly positive (see chart nearby).
In addition to seasonality patterns, we continue to watch other factors very closely, especially for their impact on Sentiment: Mutual Fund Scandals, Oil Price rises, Dollar declines, and the ever present threat of domestic Terrorism.
The near oversold conditions mentioned here last week did not reach dramatic levels. As such, market buys at the present levels have a higher degree of risk than when we see more oversold conditions. The dip-buyers have become so prevalent that the markets may not be able to reach the extremely oversold conditions so conducive to high probability trades on the long side. That’s also what’s contributing to a lack of a 5% pullback mentioned last week.
Seasonality suggests not only the above-mentioned Thanksgiving pattern, but the year-end rally as well. Starting near the middle of the December, the markets tend to gain steam as last minute contributions to retirement accounts get put to work. Tax selling sets up the January effect: Previously dumped small caps get re-purchased once the 30 day “wash rule” period has elapsed.
The action of the markets the past 2 weeks has been intriguing relative to the prior 6 months. Notably absent from the fray have been the short sellers: Their spasmodic and panicky covering is part of what fueled at least some of the previous rallies. Despite the recent market weakness, there has not been much in the way of “piling on” by the aggressive shorts. Whether this means they been scared out of the market is not certain, but it certainly is worth watching.
Maintain long positions, as we continue to watch market internals for changes in tone; A 5% pullback would be our excuse to become more aggressive buyers.