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Additional Stock Market Gains Likely Between Now and January

Equity Trends

The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the Up/Down ratio) increased last week from 4.99 to ((390/68=) 5.74. The ratio remains intermediate overbought.

Bullish Percent Index for S&P 500 stocks increased last week from 79.80% to 82.80% and remains above its 15 day moving average. The Index remains intermediate overbought.

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The Up/Down ratio for TSX Composite stocks slipped last week from 4.56 to (147/34=) 4.32. The ratio remains intermediate overbought.

Bullish Percent Index for TSX Composite stocks increased last week from 78.87% to 79.90% and remains above its 15 day moving average. The Index remains intermediate overbought.

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The S&P 500 Index added 15.69 points (1.28%) last week. Intermediate trend remains up. The Index broke resistance at 1,227.08 implying short term upside potential to 1,285. The Index remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. ‘Tis the season for the Index to move higher.

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Percent of S&P 500 stocks trading above their 50 day moving average increased last week from 77.80% to 79.80%. Percent remains intermediate overbought, but has yet to show signs of an intermediate peak.

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Percent of S&P 500 stocks trading above their 200 day moving average increased last week from 81.20% to 85.00%. Percent remains intermediate overbought, but has yet to show signs of an intermediate peak.

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The Dow Jones Industrial Average gained 28.23 points (0.25%) last week. Intermediate trend remains up. The Average tested resistance at 11,451.53. A break above resistance implies short term upside potential to 12,000. The Average remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative. ‘Tis the season for the Average to move higher!

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Bullish Percent Index for Dow Jones Industrial Average improved from 76.67% to 80.00% last week and remains above its 15 day moving average. The Index remains intermediate overbought

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Bullish Percent Index for the NASDAQ Composite Index increased last week from 62.54% to 64.97% and remained above its 15 day moving average. The Index remains intermediate overbought.

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The NASDAQ Composite Index added 46.08 points (1.78%) last week. It broke above resistance at 2,592.94 to reach a three year high implying short term upside potential to 2,735. The Index remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive. ‘Tis the season for the Index to move higher!

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The Russell 2000 Index gained another 20.41 points (2.70%) last week to a three year high. Intermediate trend remains up. The Index remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive. ‘Tis the season for the Index to move higher!

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The Dow Jones Transportation Average added 30.57 points (0.60%) last week to a two year high. Intermediate trend remain up. The Average remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

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The TSX Composite Index gained 60.52 points (0.46%) last week to a two year high. Short term upside potential is to 13,750. Intermediate trend is up. The Index remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains mixed. ‘Tis the season for the Index to move higher!

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Percent of TSX Composite stocks trading above their 50 day moving average dipped last week from 63.40% to 62.37%. Percent remains intermediate overbought.

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Percent of TSX Composite stocks trading above its 200 day moving average increased last week from 71.65% to 76.29%. Percent remains intermediate overbought.

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The Australia All Ordinaries Composite Index improved 49.90 points (1.04%) last week. Intermediate trend remains up. The Index has resistance at 4,885.70. The Index remains above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

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The Nikkei Average added 33.63 points (0.33%) last week. Intermediate trend remains up. The Index broke resistance at 10,251.90. Short term momentum indictors are overbought, but have yet to show signs of peaking. The Index remains above its 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive. ‘Tis the season for the Index to move higher!

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The Shanghai Composite Index slipped 1.39 points (0.00%) last week. Intermediate trend remains up. Support is in a range below 2,700. Resistance is at 3,186.72. Short term momentum indicators are recovering from oversold levels. The Index continues to try to bounce from near its 200 day moving average. Strength relative to the S&P 500 Index has turned mixed and currently is neutral.

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The London FT Index added 66.73 points (1.16%), the Frankfurt DAX Index improved 58.45 points (0.84%) and the Paris CAC Index gained 106.80 points (2.85%).

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The Athens Index added 19.82 points (1.33%) last week. Intermediate trend remains down. The Index continues to recover from support near 1,383. Short term momentum indicators are overbought, but have yet to show signs of peaking. The Index remains below its 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains negative.

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Currencies

The U.S. Dollar Index added 0.69 last week. Intermediate trend remains down. Support is at 75.63. Resistance is at 81.44. The Index found resistance near its 200 day moving average. Short term momentum indicators peaked two weeks ago at overbought levels and are trending lower. Seasonal influences are strongly negative in the second half of December.

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Conversely, the Euro fell 1.84 last week. Intermediate trend remains up. Support is at 129.72 and approximately at its 200 day moving average. Resistance is at 142.81. Short term momentum indicators bottomed at oversold levels two weeks ago and continue to recover.

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The Canadian Dollar slipped 0.59 last week. Intermediate trend remains up. The Dollar remains above its 50 and 200 day moving averages. Support is at 96.50. Resistance is at 100.18. Momentum indicators are overbought and rolling over.

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The Japanese Yen slipped 1.77 last week. Intermediate trend remains up. Support is forming at 118.48. Resistance is at 124.40. Short term momentum indicators are mixed.

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Commodities

The CRB Index slipped 1.25 points (0.40%) last week. The Index briefly broke above resistance at 320.38. Short term momentum indicators are overbought and showing early signs of peaking. The Index may be forming a short term double top pattern. Downside risk is to support at 293.95.

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Crude Oil fell $1.26 per barrel (1.41%) last week after reaching a two year high at $90.87. Short term momentum indictors are overbought and showing signs of a peak.

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Gasoline fell $0.04 (1.70%) last week. Short term momentum indicators are overbought and showing early signs of peaking.

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Natural Gas added $0.07 (1.61%) last week. Short term momentum indicators are overbought and showing early signs of peaking.

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Gold fell $28.00 U.S. (2.00%) last week. It briefly broke above resistance at $1424.40 to reach an all time high, but fell back to its previous trading range. Support is at $1,330.00. Seasonal influences are positive until mid February.

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Gold Futures (GC) Seasonal Chart

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The Philadelphia Gold Index lost 1.82 points (0.80%) last week. Strength relative to gold remains positive. Momentum indicators for gold and gold equities have rolled over.

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Silver touched an all time high early last week, but slipped $0.68 (2.33%) by the end of the week. Support is at 25.02. Strength relative to the gold is positive. Momentum indicators are trending down. Seasonal influences remain positive until mid February.

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Silver Futures (SI) Seasonal Chart

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Platinum fell $50 (2.90%) last week. Support is at $1,631. Resistance is at $1,806. Seasonal influences turn positive in mid December.

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Platinum Futures (NYSE:PL) Seasonal Chart

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Copper gained 11.3 cents (2.83%) last week. It broke resistance at $4.0835 to reach an all time high. Short term momentum indicators are overbought, but are trending higher. Seasonal influences turn positive in mid December.

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The grain ETN slipped $0.74 (1.50%) last week. Short term momentum indicators are overbought. ‘Tis the season for grain (particularly wheat) to move higher!

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Lumber gained $17.20 (6.90%) last week in anticipation of a favourable November housing start report. Short term momentum indicators are recovering. ‘Tis the season for lumber prices to move higher until mid February!

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Interest Rates

The yield on 10 year Treasuries added another 28 basis points last week and broke above its 200 day moving average. The increase was recorded despite continuing purchase of Treasuries by the Federal Reserve under Quantitative Easing II designed to dampen yield gains. Yields are rising partially in anticipation of acceleration of U.S. economic growth in the first half of 2011. Short term momentum indicators remain overbought, but have yet to show signs of peaking.

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Conversely, long term Treasury ETF prices broke support $93.49, resumed an intermediate downtrend and fell another $1.74 last week on higher than average volume. Short term momentum indicators continue to trend lower.

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Other Factors

The Baltic Dry Index lost another 73 points (3.4%) last week. Not a positive sign for international trade!

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The VIX Index slipped another 0.40 (3.2%) last week to reach a new eight month low. Support is at 15.23%. Equity market fears continue to abate.

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Intermediate technical action by equity markets and major sectors remains positive.

Short term technical indicators remain positive with the possible exception of momentum indicators on commodity prices. However, a short term correction in commodities is long overdue and likely will reverse before the end of the month with seasonal weakness in the U.S. Dollar.

Economic reports this week are expected to confirm a slow, but steady recovery in the U.S. economy.

Seasonal influences for economically sensitive sectors and the small cap sector are exceptionally positive beginning this week and continuing until the first week in January. Jake Bernstein noted last week at a CSTA conference that the best performing week for the S&P 500 in the year is from December 16th to December 23rd. The trade has a 75% success rate. Historically, the Santa Claus rally starts on December 16th and lasts until the end of the year.

The Obama compromise on the Bush Tax Cuts is creating lots of political heat on extreme end of the political spectrum, but it will pass probably sometime this week. The compromise will be changed. Look for the bill to be “Christmas treed” with lots of earmarks that will add significantly to government spending. So much for government cutbacks! The political focus has been on the estate tax and the extension of the tax cuts to include taxpayers with income in excess of $250,000. Neither issue will “move the needle” on government revenues significantly during the next two years. The issues that will have the greatest impact are the reduction in payroll tax paid by employers from 6.2% to 4.2% on wages up to $106,800 (a $120 billion tax cut) and the provision to allow companies to allow all domestic companies to fully expense the cost of equipment in 2011. Both issues are enormously positive for employment and economic activity by U.S. domestic corporations (Read: Small Cap companies. Approximately 48% of earnings by S&P 500 companies are realized from operations outside of the U.S.). Not surprising, small cap stocks and related ETFs have been outperforming U.S. equity indices during the past couple of weeks. Look for that trend to continue. More information on the Small Cap sector is offered below.

International political and economic events, that bothered equity markets in November, continue to fade from the headlines.

The latest investment theme is owning stocks that will benefit from higher dividends. CEOs love to offer good news when they announce fourth quarter and annual results. Many corporations are flush with cash. An easy way to please shareholders is to raise dividends. Look for lots of dividend increases when fourth quarter earnings report season arrives in late January.

‘Tis the season for investment dealers to “deliver the good news” about prospects for next year! Several major U.S. investment dealers already have released their 2011 forecasts and top picks. The forecasts released to date are universally bullish (That’s not unusual). Look for more of the same from other Canadian and U.S. investment dealers during the next two weeks.

Economic growth in China is real (as revealed by their economic reports last week) and will have a significant influence on commodity prices in 2011.

Economically sensitive sectors that currently have favourable period of seasonal strength at this time of year (e.g. Technology, Industrials, Materials, Consumer Discretionary) have a history of moving higher until early January, correcting until the end of January and moving higher thereafter until May. Given the current short term overbought level for economically sensitive stocks and related ETFs, history has a high chance of repeating during the next few months.

The Bottom Line

Continue to hold favoured equities and related ETFs for additional gains between now and early January, followed by a brief correction that will offer an opportunity to add to favoured seasonal trades.




Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Comments and opinions offered in this report at timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.Don and Jon Vialoux are research analysts for JovInvestment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of JovInvestment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by JovInvestment Management Inc