|How to Handle the Year-End Market|
By Jim Koford
DEC 22, 2010 10:45 AM
Remember to allow the action to come to us. There are a number of names that have attractive charts and good numbers, but be careful to not force trades or chase extended charts.
Seasonality is never a guarantee, but it’s usually a safe bet that as the year starts to wind down and big money managers look to tack on some last-minute relative performance to their portfolios, we’ll get a benign trading environment. Aggressive traders know this, and will often use this time of year to hunt for, and often create, little pockets of activity.
Over the past 80 odd years, the S&P 500 has been higher over the final seven trading days of the year, and when you have odds like that, it’s hard for it not to become a self-fulfilling prophesy. Even two years ago, when the market had spent the previous couple of months coming apart at the seams on the heels of multiple collapses of major financial institutions, the S&P 500 was able to advance 3.6% over that time frame.
This year we're faced with a market that has seen the S&P 500 finish green 13 out of the 15 trading days so far this month, and the biggest challenge that many investors have faced since the indices broke out of their respective trading ranges several weeks ago has been avoiding the temptation to anticipate some sort of correction. Indeed, one thing that I can say with a great deal of confidence is that this sort of action can’t continue forever. The further we float into the ether, the greater the likelihood that once we do start to come back in, the more vigorous the move to the downside will be.
Last week, some sideways action allowed the indices to work off some of their overbought conditions, and some profit-taking in market darlings like Netflix (NFLX) and Chipotle Mexican Grill (CMG) provided a chance for traders to do some dip-buying along key support levels, but the action so far this week has again left us rather stretched to the upside. Given that big money managers have some hefty gains to protect, I suspect that we’ll see some money flow into some of those higher-beta big-cap tech names.
The key right now is to avoid the temptation to call a market top, but that doesn’t mean we need to put on our blinders and ignore any signs of trouble in the pricing action. At some point, some bit of news will come along that will provide traders with a convenient excuse to head to the sidelines, and that’s why it’s so important to make sure we’re padding our bottom lines by booking partial gains where we have them.
The bottom line, then, is to remember to allow the action to come to us. There are a number of names out there that have attractive charts and good numbers, but we have to be careful to not force trades or chase extended charts to the upside just because we’re itching for something to do that doesn’t include spending 45 minutes trying to find a parking spot.
No positions in stocks mentioned.
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