I wish everyone a great holiday. The markets have seen fit to take back most of the gains for the decade, but at least they are not playing Grinch this month. The low which materialized on Nov. 21 has turned into the Santa Claus rally. As I told you in this space last month, it would only be recognized as such if the rally had the staying power to last until the days leading up to Christmas.
In most instances, the major averages have come up to early December highs and have been unable to break through. This is the case in the Dow, NDX and NASDAQ. The SPX actually put in a new print high for the cycle this past week. The SPX is at an inflection point as it is sitting above the 20-day moving average and below the 50. The tech indices are at a similar juncture. In terms of component sectors, both the SOX and BBH put in new highs right in this sequence. Probably the most notable is the BBH which is already testing the 200 day moving average. Since the BKX banking sector is lagging we have a situation where it is now the biotech arena that is leading to the upside. This may end up having a very profound influence on the market heading into the New Year.
For now, it shows an appetite for risk is returning to the market. I’ve stated for years that in order to have a tech rally, it is necessary to have either the SOX or BBH as a strong participant with the preference for both. The SOX may be the brains of the operation but biotech is the heart. Any sustainable rally needs to have a heart. Why is this vital? The stock market is a mechanism where people believe they can get rich without having to do a lot of work. People are always willing to gamble on the next big biotech company that thinks they have a cure for cancer or diabetes. It doesn’t matter if they really do or even if there is any revenue. It’s the hopes and dreams of speculators that take a stock from 5 to 25 in a matter of weeks. Where else can you get such bang for the buck? Also, hope dies hard and sticks around for awhile.
The pivotal point of the week was the Fed announcement, where they said they’ll throw the power and might of the United States government at the problem. The markets rallied out of the news, but still couldn’t get through resistance. They were likely to rally anyway, since we told you last week the SOX was setting up to do better. But once again, sentiment turned a bit too happy and you know happiness is not allowed in the stock market. All of this materialized at upper testing levels so we spent the rest of the week at these levels or lower.
Now we are confronted with the light volume holiday trading period until the end of the year. We are in a position where biotech is trying to lead and the SOX trying not to falter. The US Dollar finally reversed course last week and sentiment got to an extreme there as well. This column offered you a world exclusive right before Thanksgiving that the Dollar was topping on a last leg that was a 1.27 extension out of a triangle at 163 hours. Now they tell you the Dollar has collapsed! They also tell you we are in the midst of a reflation trade, after the gold chart rallied over 100 points in the space of a week. Now that up trend line has been broken at the 200 day moving average while the Dollar has surged up to 38% of that ‘collapse.’
This is a critical period because if the Dollar punctures 38%, it opens the door for upper testing and would not be good for the aspirations of the rally. This is shown on our chart of the week. What usually happens is a chart will pull back from 38% to either regroup or collapse. Now think about those inflection points I described above and you’ll realize how critical all of this really is.
But it is also likely to require some patience because I don’t expect anything to be resolved this week. I think we could be all over the map and this could be an intraday trading paradise. I think there is a reasonable chance we are in some sort of triangle which may not resolve until a week from now. That may seem like a long time but with a middle of the week holiday; Friday will be here sooner than you think.
In the bigger picture, the tech indices are entering the 60-62 week high to high cycle with the 2007 top and if it survives the first week of the New Year, it could be worth 200 NDX points to the upside.
