Will Santa Come?

Random Thoughts

The Ps (S&P 500) tried to rally but unfortunately, they came right back in, losing over ¾% on the day. This action keeps them well below 2000, below their prior breakout levels, and below their 50-day moving average. The Bowtie moving averages (10sma,20ema,30ema, watch this Youtube) are on the cusp of crossing over. It is important for the index to stabilize around these levels. The Ps are at inflection point. At this level, any additional weakness would be concerning. About the only thing good to say is that they look a little sold out.

The bounce from oversold will be important. If it is mediocre at best then we could have a potential top in place. If the market goes on to make new highs then once again, we have dodged a bullet. Now is the time to pay careful attention.

The Quack (Nasdaq) lost around 1 ¼%. This action puts it below its 50-day moving average and it has it below the previous breakout levels, circa 4600.

The sector action didn’t seem as abysmal as one would think based on the slide in the Ps and Quack. I suppose this is evidenced by the Rusty (IWM) which only ended slightly lower. Yes, most sectors ended lower but those that were extremely sold out bounced. It seemed like the market played a little “catch up” to those areas that have been defying gravity such as Retail and Health Services.

However, make no bones about it though, Tuesday was yet another ugly day. The pulling back in stronger areas eventually has to stop.

The $64,000 question is, will Santa come? A lot of people count on the end of year so called “Santa Rally.” Me? Well, seasonals are tough. Yes, they usually work but sometimes they don’t. So, you can’t count on them. What’s worse is contra-seasonal moves can be ugly. People who were counting on Santa to save them become very disappointed.

So what do we do? I think the song remains the same: Do pay attention to what’s going on but don’t make any drastic decisions just yet. Do watch the aforementioned moving averages. In the sectors, if more pullbacks become “inflection points” and more “inflection points” become rollovers then we might just have a turn. The great news that you really don’t have to make any big picture predictions. Leave that to the taking heads. Simply letting the ebb and flow control your portfolio will help to keep you on the right side of the market. Honor your stops. Although it can be a little painful, it’s amazing how stops can often take you out of a market right before it gets really ugly. At the risk of preaching, he who fights and runs away lives to fight another day. Do wait for entries. If the longer-term uptrend does not resume, that in and of itself will keep you out of new trouble. Do pay attention to the database. If we do not see upside follow through—and soon, we will likely start seeing some shorts setting up. The bottom line is to keep your head. Run your portfolio and do the right thing.

Best of luck with your trading today!

Dave