Opening Whisper
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Are you ready for a major sell-off or crash in market prices? Is the rally of the last 6 weeks losing momentum? What can we expect in the last 19 trading days of 2005? And what will unfold in the early days of January?
Last week we looked at the similarity in the S&P index price patterns between 2004 and 2005. That review helped us to put the November rally in some historical perspective and gave us a trend bias that might prove useful for a couple more weeks. This week I thought we would take another look at how the markets have traded going into year end and then into January over the last few years.
Planning Our Year-End Trading Strategy
So what are you thinking about December 2005/January 2006? You might predict a likely continuation of the rally into year end and then some significant selling starting in January? Hey, that's what I've been thinking too! Uh-Oooh! If we are both thinking the same thing, then we are probably both wrong. Well, where might we get tricked by this market?
Let's try this scenario; Rally into December 23 and then head for the exits on December 27 (NYSE closed on Monday Dec 26th in observance of Christmas). After all, if a January sell-off is likely, then certainly there will be those who don't want to be the late one trying to squeeze through the crowded market exits on December 30.
But why sell? The markets appear to be coming off of two years of consolidation. Would it not be expected that we trend higher? And perhaps then the final scenario that would prove us both wrong is one in which the markets rally right into January and February without so much as taking a breather. Would that be a blow-off top?
The thing that strikes me as I review these various possibilities is that we need a non-emotional and technical approach to the markets as we move into the final trading days of 2005. Trend following provides the foundation of that approach and our Listening methodology demands a minimum of bias and avoidance of prediction as we follow the market's lead dancing into New Year's Eve.
The following charts show the comparison of year-end price trends;
Here is our tabulated summary of the year-end trends for the last 3 years;
Year-End | December | January | Movement |
 | |||
2004-2005 | +3.3% | -2.5% | Up/Down |
2003-2004 | +5.1% | +1.7% | Up/Up |
2002-2003 | -6.0% | -2.7% | Down/Down |
Average | +0.8% | -1.2% | Up/Down |
This brief analysis reveals only a mild average upside bias in December and a mild average downside bias in January. Perhaps we can see that the 2004-2005 year end fits the average most closely (limited number of data points). Last year was an "Up" December and a "Down" January. Can we arrive at some explanation for this? Is there some pattern? We might simply suggest that there was profit-taking in January-February 2005 after the significant move from August 2004, including the presidential election contribution to the rally. This in the face of the economic unknowns of 2005 may have led to the profit-taking.
Are we in a similar situation to last year? I would suggest that we are. We are bouncing off of October relative lows and rallying right through November. If we see the rally continue through December of 2005, then we might conclude that January could see some profit-taking as the fog of war, oil prices, interest rates, housing prices, Bernanke and the 2006 election provide the uncertainty typical of rally killers.
Are we seeing 'buy the rumor and sell the fact' for the last of the Fed rate hikes?
Listener's Conclusion
So how does this impact our trading decisions? We are Market Listeners and trend followers because we avoid trying to tell the market what it must do in this, or any other year. Following is good. Listening is good. But taking profit may be better than both!
Since we are up more than 35% year-to-date, there may be a case for sitting out the next 4-5 trading weeks until we see where this market is going.
This report is only a partial weekly report without trading signals, stops and trading instructions for the week ahead.
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What Is The Current Market Sentiment?
The VIX weekly chart below again reveals the sharp decline in the volatility index over the last 6 weeks. This week the VIX ticked up slightly. We are definitely at a level where we could see a rising VIX (bearish) and some selling as we saw earlier this year (August 3).
2 Year Weekly - Volatility Index ($VIX)
Our Trading System - What The Numbers Are Telling Us
Our weekly trading model chart (below) is still showing all indicators in overbought territory. It would appear that only the CCI has lost some momentum over the last 2 weeks, but is still well above the 100 level.
The weekly and monthly stochastics are overbought (above the 80 level) and the daily is just recovering from the Wednesday sell-off.
The MACD ( 12-26-18) and faster MACD Histogram ( 12-26-8) may be topping out at this point. Have we reached a peak in the buying power of this rally? We may be close to an interim top.
6 Month - Weekly - NDX Model Chart
A Trader's Quote: As Market Listeners we choose to make discretionary and mathematical adjustments to our "system" to allow it to be adaptive and dynamic and not limited to a curve-fitted, back-tested, black-box algorithm which worked in the past, but hasn't worked under recent market conditions. Perry J. Kaufman, in his book "Trading Systems and Methods" says, "An adaptive method can be a process as well as a formula." Listening is a process, not a formula.
The Markets Are Whispering - Are You Listening?
Our Market Listener Trader YTD return in the hypothetical account is approximately + 35.2 as of December 2. {The 6 mo. Return= 8.8%, 12 mo.= 36.8%}
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Listen To What He Says
NAB Psalm 22:14-18 "I am poured out like water, And all my bones are out of joint; My heart is like wax; It is melted within me. My strength is dried up like a potsherd, And my tongue cleaves to my jaws; And You lay me in the dust of death. For dogs have surrounded me; A band of evildoers has encompassed me; They pierced my hands and my feet. I can count all my bones. They look, they stare at me; They divide my garments among them, and for my clothing they cast lots."
NAB Matthew 27:35-37 And when they had crucified Him, they divided up His garments among themselves by casting lots. And sitting down, they began to keep watch over Him there. And above His head they put up the charge against Him which read, "THIS IS JESUS THE KING OF THE JEWS."
I am working on the art of listening and hope that you are also.
Best Profits,
