What comes after the Ho, Ho, Ho! of the Santa Claus rally usually isn’t quite as jolly
It’s January. Time to think about taking some profits?
Or at least to settle in for a period when U.S. stocks as a whole don’t go much of anywhere.
January ends the three month period that for more than 50 years has been on average the best part of the year for U.S. stocks, according to The Stock Traders Almanac. In his December 29 comments on StockCharts.com John Murphy notes that the 2009 rally looks very similar to the 2003 rally. Both began in March and ran strong through the end of the year. The 2003 rally peaked in the first quarter of 2004 and then corrected into the fall of 2004. As Murphy rightly notes, “There’s no guarantee of a repeat performance in 2010. But there is a lot of seasonal precedent for stock rallies to stall in the early months of a new year.”
As you’d expect from a month that ends the strongest three-month period for U.S. stocks, January often means an end to sector rallies.
Yes, stocks are rotating away from risk but does it mean anything?
On the surface the stock market isn’t going anywhere. The choppy daily action hardly moves the Standard & Poor’s 500 Index in a narrow range between 1088 and 1100. A “strong” rally like that of December 11 moves the index 4 points or 0.37%.
But beneath the surface the market continues its rotation away from the energy and financial sectors that led the rally until October. And toward healthcare, which started to move ahead in October, and utilities and telecom, which joined the leadership in November.
Short-term stock market momentum falters; watch for signs of a further breakdown
So far—as of yesterday, that is—the dollar rally has been just a bounce. But a rising dollar has now pushed the euro, the Australian and Canadian dollar, and the Brazilian real down to a critical level. Same is true for gold, oil, and other commodities that have soared as the dollar fell.
These strong currencies and commodities are on the verge of breaking through their 50-day moving averages. If they break below those trends, it could signal—and indeed set off—a deeper correction in these assets.
Stocks hit the top of the channel again; a 5% correction would be business as usual here
Here we go again.
For all the ups and downs; the crisis scares and the crisis solutions; the good numbers and the bad numbers; this stock market is still moving up.
But instead of running up by leaps and bounds, it’s now inching up. Each time it rallies it manages to push the top of the range up just a few points before it sinks toward the bottom of the range where it sets a slightly higher low.
Let me show you what I mean on the Standard & Poor’s 500 Stock Index.
More testing ahead for stocks
Not so long ago, November 18 to be precise, I wrote that the rally was still firmly in charge.
Right now I’d take out that word “firmly.”
I had thought that when the Standard & Poor’s 500 closed above 1110 on November 17 stocks were done consolidating and had definitely broken out of their trading range between the October low of 1025 and the October high of 1098.
I was wrong. With the U.S. dollar strengthening the index has pulled back instead of moving ahead. Stocks now look like they have more work to do before they can move higher.
