Entering the Final Stages of a Strange Year

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People get all fired up as we enter the end of the year. What moves should we make before year end? If they aren’t part of your long term plan why should you make a whole lot of moves just because the calendar now says December?

We are near lows in investor sentiment while consumer sentiment is at multi year highs. “Smart” money has been scared money all year. The market has climbed the proverbial wall of worry all year except for a sharp decline in April and a rough September. We saw a real sharp decline of roughly 6% in seven days after the election also. But, the S&P 500 is up strongly this year. Pension plans have less cash than they had at bear market lows. Like I said “smart” money has been zigging when the market is zagging all year long.

November followed the same script. There were wild market swings and a ton of fear but the S&P 500 finished marginally higher for the month. The S&P 500 was off 4% at one point in the month as headlines buffeted the market on a daily basis in November. European uncertainty remains. The repeated attempts to implement reforms have not borne fruit. Yet sovereign bonds in Europe continue to soar off their lows and European stock markets are performing nicely. A problem that doesn’t completely derail things becomes a catalyst when the situation is finally worked out.

Election results weighed on the markets in November. Market averages rallied into the election and the S&P 500 rose almost 1% on Election Day. Then people woke up the next morning and decided that the fiscal cliff was real and let’s just start selling. Sell everything that is not bolted down. The selling became quite irrational as the stocks that tend to do the best in a selloff, big stable blue chips, were down almost 50% more than the overall market. If it had a dividend attached to it, especially an attractive dividend, it was sold in the week after the election. The day after the election the S&P 500 was down 2.4%. That sort of behavior had to throw the efficient market guys for a loop. The selling after the election brought all of the major averages below their respective 200 day moving averages. Then there was a huge Thanksgiving week rally that wiped out a good portion of the most recent downturn.

Of course that steep decline led to buying and the averages are now dealing with resistance levels. If you can make any sense of this please let me know. Every poll showed who was going to win for several months and the fiscal cliff issues have been out there for quite some time. The swings in sentiment one day to the next have been sharp and quite astounding to watch.

Since most people haven’t made a ton of sense recently maybe it is best to just look at the chart and focus on key numbers. The press conferences regarding the fiscal cliff are going to come fast and furious over the next few weeks. Let’s look at the key technical levels and see where we should become concerned and when we should have some fears calmed.

We should first look at the 50 day moving averages for the major indexes. Let’s look at the key technical levels for the S&P 500, Dow, NASDAQ and Russell 2000. The S&P 500 will find resistance at 1422. The high today was 1423 and sellers came in and moved the S&P off its 50 day and actually closed 0.47% lower. It is not surprising that the index failed to take out the 50 day on the first try, which is often the case. The Dow will find resistance at 13,199 and the NASDAQ resistance level is 3024. The Russell actually closed Friday just over its 50 day moving average of 821.

Intermediate term support for the S&P 500/Dow/NASDAQ/Russell 200 are as follows: 1383/12,764/2934/798. Short term support levels are: 1409/12,960/2995/813.

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About Thomas J Smith CFA