Impressive Rally, But What’s Next?

Despite heavy selling the week ending December 3rd, the stock market action last week rekindled hopes for a full-fledged Santa Claus rally. Just two weeks ago on November 28th, I gave my most likely downside targets for the Spyder Trust (SPY) and Invesco QQQ Trust (QQQ). For SPY it was the $448-$450 area and for QQQ it was the $379.52-$380 area.

My downside targets were hit the next week with a correction low in the SPY at $450.29 and at $378.90 for QQQ. The decline started on November 22nd as both the SPY and QQQ formed key price reversals. The selling was heavy enough going into the December 3rd lows that I thought we might see another week or two of selling, but that was not the case.

The Dow Jones Industrial Average and Nasdaq 100 Index opened higher last Monday and closed with 4% gains for the week. The S&P 500 Large Cap Index also gapped higher on Monday and had a gain of 3.8%.

Both the Dow Jones Utility Average and iShares Russell 2000 were up 2.4% last week while the SPDR Gold Shares (GLD) closed unchanged for the week. GLD is down 6.6% YTD (year-to-date). The Dow Jones Transportation Average is up 31.2% YTD leading the solid gains in the Nasdaq 100 Index and S&P 500 Large Cap Index.

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The NYSE Composite was up 3.1% for the week as it had dropped below its starc- band the previous week with a low of 16,133. The low from July-August at 15,933, line b, has held. A close back above 17,014, line a, would be a positive sign.

On the NYSE last week 2476 issues were advancing and 1064 declining which was important as the NYSE All Advance/Decline had dropped below its WMA and the August low. The NYSE All A/D line turned up this week after holding above support at line c, but it is still below its WMA. The NYSE Stocks Only A/D line (not shown) is also still below its WMA.

The failure of a majority of stocks to make New Highs in November along with the surge in New Lows in both the NYSE Composite and Nasdaq Composite warned of the market’s correction. In last week’s trading there were 186 New Highs and 244 New Lows. On Friday the New Lows also exceeded the New Highs. This is not consistent with a healthy stock market rally.  

The Spyder Trust (SPY) traded in a tight range last week after closing over 2% higher on Tuesday. SPY closed Friday just 0.6% below its all-time high at $473.54. There is chart resistance at $479.42, line a, which corresponds to the daily starc+ band. There is support at $463.29 with the monthly pivot at $461.47.

The daily S&P 500 A/D line closed above its WMA on Tuesday and after a slight pullback on Thursday it again turned higher. It is still well below the high it made on November 16th. The A/D line is above its flat WMA and would take several days for the WMA to rise which would be more positive. The volume peaked on Monday and declined the rest of the week. An increasing level of volume would be more positive for the stock market.

Investors and traders are also challenged by the bond market action. Given the highest CPI reading since November 1982, it was not surprising that the yield of the 10-Year T-Note rose last week.

However, the yield curve based on five and 30-year treasury yields has narrowed and reached the low last seen in March 2020, line b, before it turned higher. According to Bloomberg “it is a sign bond traders are betting faster rate hikes will undercut the red-hot economic expansion”. If yields can move higher into the end of the year it will remove a concern of many investors.

The economic calendar this week has the Producer Price Index on Tuesday along with the start of the FOMC meeting, followed by Retail Sales and the FOMC announcement on Wednesday. Even though the technical outlook for the stock market is positive, volatility is likely to be high for the rest of the year so would only recommend cautious new buying until the A/D analysis gets stronger.

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