Short termed pullback, but Santa still looks to be coming

S&P nearterm

 

The Santa Claus Rally takes place in the final week of December – and sometimes carries on for a few days after. It was first discovered by Yale Hirsch, author of Stock Traders Almanac. This rally caps the seasonal period of strength in the last half of December.

After December, we often get the small capped effect – where prior smaller capped losers rally from oversold conditions after tax loss selling. This year promises to spotlight energy and commodity based small caps in the small capped rally. It might even carry some of the larger capped energy plays with it. Trading oversold bounces can be appropriate for shorter termed traders and speculators.

As you will see on the daily S&P500 chart, there are a few signs to suggest a temporary pause before all of the seasonal fun begins. Note the diverging/ declining money flow oscillator (top pane) – its a short termed indicator suggesting potential profit taking by market players. Note also the diverging RSI indicator, marked by my notation on the chart. We also have a bearish crossover on the MACD indicator, circled.

Despite these short termed selloff signals – the bigger picture looks good. The S&P took out its prior high recently, and the cumulative money flow indicator (bottom pane) is pointing up and steady. Moving averages are pointing the right way, and the market isn’t too much over its 200 day line, suggesting it’s not at all crazy-overbought.

Any correction in the coming days might be a good opportunity to acquire stocks you’ve been eyeing for a while. I don’t expect much downside if we do get a pullback – so be prepared to act quickly if and when such an opportunity occurs.

 

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13 Comments

  • Keith:

    I know you have traded the xcs in the past. Given it has a large component of energy and materials is this something you may look at or are you staying completely away from commodities?

    Reply
    • Terry–you nailed it. Yes, we’ve traded it in the past quite nicely. No, we wont be doing that this year for the very reason you mentioned. I’d rather focus on IWM-US for this years small capped trade.
      Mind you, if you bought XCS in late December and sold it into January, you might have a shot at a very nice oversold bounce. That’s not the type of trade that our conservative mandate at ValueTrend dictates, but it may be suitable for an individual who doesn’t mind trading the near termed moves, and keeps a tight watch on that trade.

      Reply
  • Hi Keith
    It looks like the XLE has broken down today from support at around $80. Just looking at the chart there doesn’t seem to be much to stop it from falling even further. Do you see any potential entry points?

    Thanks

    Reply
    • Watch oil. I think it could go to $40 eventually, although as mentioned in the blog, it could rally neartermed into January. That will be your signal to watch XLE. Not sure how they will correlate.
      Meanwhile—Don’t try to catch a falling knife Tom!!!

      Reply
  • TSX MARKET: SOME ANALYSTS ARE LOOKING FOR SUPPORT AT 13646 (OCTOBER LOW). I UNDERSTAND THAT WE ARE IN A TAX LOSS SELLING PERIOD (ROUGH ON OIL AND GAS AND PRECIOUS METALS). SHOULD WE SHORT THAT MARKET (WITH HIX.TO) NOW OR IS IT ALREADY TOO LATE? IS IT BETTER TO WAIT FOR THE “SANTA CLAUS RALLY AT THE END OF THE MONTH?

    PS.S: I ALREADY BOUGHT TLT AS A MEAN OF PROTECTION

    GOOD DAY AND THANKS FOR THE EVER ACCURATE ADVICES

    Reply
    • Hi J.P.
      Hey, I love the “advices” comment. You must have seen Arnold Schwarzenegger in Pumping Iron–where he said he gave Franco Colombo “bad advices”
      Anyhow–there may be some downside left, but that’s up to you if you want to short
      BTW–good move on the bonds. I agree with the downside projection–not much left to go now to the Oct low point!

      Reply
  • Keith:

    Lately I have been looking at the Shiller PE ratio and it is getting very close to resistance level of 2008. Also, comparing the Dow Jones Industrial to the Advance/decline line and A/D looks like it’s hittng resistence. Your thoughts.

    Thanks

    Reply
    • Thanks for this Paul. Yes, it is worrisome. Note in the past that the Shiller PE can hover in danger zone for quite a while before the you-know-what hits the fan. Check the mid-2000’s multi-year high Shiller ratio. But its a sign – that, along with the S&P trailing PE at the high end of the range, and even the price/ book at fairly high levels. Hey–Look at us, sounding like a couple of fundamental types!
      My two cents: the trend is our friend, until it ends. We can’t cherry-pick a top, so I will stay with the market until the 200 day MA is broken for more than a couple of weeks and a low is taken out. I expect the seasonal play to work well this winter, meaning more upside, after the current correction ends. Thereafter, I would suspect that next summer or fall may end up being a 20% or more correction. We haven’t had one of those since summer 2011. We are overdue, and the Shiller ratio, etc are setting the stage.

      Reply
  • Hi Keith, I have been watching ZUB for the last three days very closely. It broke $21 on Friday. It stayed over $21 for three days but did not have a 3% increase. How is that to be interpreted? When would you recommend a buy on this ETF? Thanks.

    Reply
    • I am looking to enter this position soon, no it hasn’t had a 3% increase–but the broad market is not giving it the opportunity to do that, given the down pressure. So long as its around $21, probably safe to buy soon. Let the market finish its selloff and then consider a move.

      Reply
  • Keith,

    I am long Tata Motors (TTM) from higher levels. It seems to have broken the uptrend from late March that you were eyeing and been weaker than the S&P. It’s right at the July high and October lows. Given that it still has a good long term trend, what level would you be looking for the stock to break to suggest it’s time to get out and re-evaluate the bullish thesis, give your stated 1-3 year holding timeframe? thanks.

    Reply
  • Keith, not sure if my last question went thru on Tata Motors, TTM-N. Would it be a sell if it drops below the current level (Oct low, July highs)? It just broke the uptrend from April.

    thanks.

    Reply
    • Tata’s last low on both the daily and weekly chart is at around $41. The 200 day MA lies around there also. I’d hold off on selling until a multi-day penetration of that level is realized.

      Reply

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