Is The Market Ready to Move?

December has been a quiet month for stocks. Initially, I anticipated the market would have launched into a rally by this time. However, the indexes seem to be taking a quick respite before its next great move. In which direction will it trend? My opinion continues to be that stocks will tick higher. I base this conclusion on several factors.

The indexes have moved above their respective 50 day moving averages. Since the first touch of the 50 dma at the beginning of December, the 50 dma has gone from turning downward to moving sideways; this usually precedes a breakout to the upside. This signal is slightly suspect as the breach occurred during a low volume week. The upcoming week should tell us whether the move is truly legitimate.

Another positive sign is that the SPY and QQQQ breached key resistance in the 91 and 30.60 areas, respectively. Again, this action is tempered by the fact that the breakout occurred during a low-volume week. The upcoming week should give clues if this is indeed the beginning of a tradable rally.

The Volatility Index continues to decline. On December 1st, I noted the Volatility Index chart was showing a topping formation. However, I did not expect such a dramatic decrease. This week, it closed below 40 for the first time since the beginning of October. The VIX is now in a well-defined downtrend. A VIX reading below 30 would indicate an environment more favorable for investors and traders to enter the market.

Investor Sentiment is still negative. Some analysts have argued too many have entered the bull camp. As of January 2, Investors Intelligence reported that newsletters are 38.5% bullish and 38.5% bearish. While the number of bulls has increased and the number of bears has decreased, the readings are nowhere near the levels that indicate investors are overly optimistic, resulting in a decline.

The market is impervious to negative news. While negative forecasts continue to pop up in the press, the indexes have shrugged it off and refused to decline. Moreover, for the foreseeable future, it does not seem that the "other shoe is about to drop" in the sub-prime mortgage debacle.

If a sizable rally is indeed under way, traders should pay close attention as it may portend the beginning of a new bull market. Dow Theorist Richard Russell instructed market watchers to scrutinize rallies after the market entered a phase of utter despair, as "...this could be either another reaction (upwards) in the bear market, or the first primary rally in a new bull market." If volume is lighter on the first pullback of the rally, chances are good that a new bull market has been born. Time will tell if this is the case.

Disclosure: No positions at this time.

Comments

[investor88:]

The market is moving up and looks ready to go as Kingsley has pointed out. I am a little bemused that Kingsley being open minded and rightly pointing out the positive trends "has no positions at this time" - ie he is leaving the prize to others, not out there grabing a piece of the stock action!

On balance, it is better not to be greedy yet as buffet has advised. Preservation of capital still important in the face of financial turmoil.

Jan 04 08:59 AM

[Paul Price:]

You said,

"The Volatility Index continues to decline. On December 1st, I noted the Volatility Index chart was showing a topping formation. However, I did not expect such a dramatic decrease. This week, it closed below 40 for the first time since the beginning of October. The VIX is now in a well-defined downtrend. A VIX reading below 30 would indicate an environment more favorable for investors and traders to enter the market."

In fact, investors who got long when the VIX peaked in Oct. and Nov. aare now sitting on great gains. Those who waited for the VIX to come down have missed the bottom on most stocks by at least 20 - 50%.

Jan 04 09:05 AM

[sleepless_o...:]

Good analysis. I am waiting for the market to close Tuesday before adding any positions

Jan 04 10:15 AM

[ArtfulDodger:]

A lot of people are turning bullish, and this is beginning to bother me some.

Personally, I liked searching for slaughtered stocks with good earning potential and good balance sheets when almost everyone was bearish. (I'm too stupid to understand tech graphs!)

If I see much more of this bullish sentiment bouncing around, I'm going to rethink some of my recent buys.

Jan 04 10:26 AM

[peterthepai...:]

if it looks like a rally...an walks like a rally...

check out the claws...if it has claws...

it's a **** market rally...

Jan 04 01:16 PM

[blonde molly:]

Paul Price, good comment. You can't wait until the water is perfectly calm to jump in. If you do you'll find nothing but sharks waiting for you.

Blonde Molly

Jan 04 06:50 PM