(11:00 am Update) As the market heads into the final three days of what has proven to be a fruitful year in spite of many negative headlines, bullish sentiment (aka. complacency) continues to hit excessive levels and has been doing so for several days. This may be foreshadowing a pullback is on the horizon early in the new year. The long-term technical condition of the stock market remains sound, however, one of our “Core 4” internal indicators has moved to red, while the other three remain green. This current technical condition puts our signal “on the bubble” with an effective weighting of 2 green and 2 yellow. Our Current Market Outlook is still “Market in an Uptrend” with a “green” light, but hanging on to green only by a thread.
While the major stock indexes are fresh off of all-time highs just this morning, the volatility index (VIX) is curiously on the move, up 4% today. Has the year-end rally run its course? We don’t know, but it looks like it may have.
Some pundits are speculating that many investors are waiting to take profits until after the new year. If that is so, it would line up with the persistent sentiment warning signs. For many investors, the urge to take profits will likely grow next week. As a result, it would not be surprising to see the S&P500 correct back to its 50 day mav (currently 4% lower) over the next several weeks.
What should investors do now? Taking partial or even full profits on holdings that have advanced 20% or more is prudent. Preparing a “buy on a pullback” watch list of fundamentally and technically superior stocks that have risen too far to chase now is a good step. Concerning playing defense, expect a test of the 21 day moving average by the major indexes and leading stocks. If it holds, great! If it fails, then expect an expansion of a pullback, most likely to the 50 day mav. We do NOT see the technical evidence of seeds being planted for a severe correction, nor a bear market. The “bears” are deep in hibernation, for now. Sleep well Teddy.
Have a Triumphant day! ® Ps. Happy birthday to my brother Michael!