TSP Talk – Seasonality vs. the overbought bear market

Good morning. It’s your Monday dose of TSP Talk’s market commentary.

Stocks rallied sharply after the announcement of the auto bailout on Friday, as the Dow moved up about 200-points, but just like we saw after the financial bailout, the gains were quickly given back and the Dow finished down 25-points.

The S&P 500 and small caps did manage to hang on to some gains with the C and S funds moving up 0.25% and 0.92% respectively. The I fund dropped about a percent as the dollar rebounded from its recent precipitous drop.

The S&P 500 remains in the rising wedge and has been bouncing between to 20-day moving average and the 50-day moving average the last few days. We should experience light volume trading over the next two weeks, and while the holiday bias should be up, the light volume could push the market around pretty easily if there is any good or bad news announced.

I am watching 918 and 851 areas for a break to a higher high, or lower low. If we do see a move above 918, I am seeing some signs of a possible head forming, similar to the rising wedge that was created with the formation of the head of the head and shoulders pattern we saw earlier in 2008. It’s kind of a stretch at this point since we would need a significant rally to move the head above the left shoulder I’ve circled below, but right now I believe that only question is whether we head down now, or after a longer rally. But at some point I expect to see a test of the lows.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The NYSE has been able to overcome recent overbought levels, showing some pretty good resilience. If this was a bull market I would say this looks pretty good, but we have to believe that we are still in a bear market until we get some confirmation, so I would surmise that this prolonged overbought condition will eventually result in another move down, just as it did the last three times we saw this indicator stay above -0- for any length of time.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Once again, here is the pre/post Christmas seasonality chart. The strong seasonality kicks in on the trading day before Christmas and has lasts into the new year, but the last couple of years have been more choppy than that.

Chart provided courtesy of www.sentimentrader.com

Here is a daily results chart of the prior two holiday season’s trading, and below that is what happened during the holiday season of the three years of the prior bear market of 2000-2002.

I am not drawing any conclusions from it, but if you can see a pattern, maybe it can help you. One thing I noticed is that the final trading day of the year was down 4 of those 5 years, and the trading day right after Christmas was up 4 of those 5 years.

That’s all for today. Thanks for reading. See you tomorrow!