A Year-End Wrap and Look Ahead to 2007
As I tend to do at the end of each month, below
is a rundown of many things I look at:
Positives
Foreign Markets — Most foreign markets have
continued to produce. They are at or near new highs. Plurality among markets is
confirming and strength abroad is a positive. Some of the leaders include
Sweden, Mexico, and Spain.
Breadth — Breadth remains generally positive. New
highs have been significantly higher than new lows. It’s a little concerning
that the spread is not as high as it was in the recent past, but it is still net
positive. The advance/decline line continues to trend higher, as well, which is
a positive.
Neutral
Accumulation/Distribution — Price and volume
action has been choppy of late. There have been small bouts of both accumulation
and distribution, but nothing consistent. The action here is neither bullish nor
bearish currently.
UUWNHI (Unofficial, Unscientific, Working/Not
Working Hanna Indicator) — In October and November we saw several examples of
stocks that were breaking out of basing formations and exploding higher. That
explosiveness seems to have dissipated this month. Investors appear less likely
to chase returns. This lowers the potential reward side of the reward/risk
ratio. At the same time, I’m not seeing a barrage of breakdowns, either. This
indicates it’s not yet the time to be aggressively shorting.
My stagnating watch list — Over the last two
weeks I’ve seen fewer and fewer new stocks setting up in basing formations.
During healthy bull market conditions, this list will expand. When the market
sells of the list begins to shrink. Lately, it’s just been stagnating. No real
advantage either way.
Negative
Sentiment — Sentiment is overly bullish. You’ll
note I also stated this last month. That’s somewhat typical of extreme
bullishness. It can last a while before the market actually sells off. It does
tend to have a negative affect on investor risk/reward, though.
Other — There are two factors I’ve mentioned over
and over recently that continue to concern me. The first is the loss of momentum
in the rally. Momentum divergences many times begin to show up 1-4 months before
the actual market top. It has now been about a month and a half since I first
noted this momentum issue. The second concerning factor is the continually
declining relative strength of the Nasdaq vs. the NYSE. Investors are seeking
safety and historically the market has struggled to make any headway when this
occurs.
Summary
My song remains the same. The fat part of the
rally is over. The excitement has waned. We are likely at least midway through
the topping process, and I would expect to see a selloff begin in the 1st
quarter of 2007.
Best of luck with your trading, and Happy New
Year!
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.