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.