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The good news and the bad news.


One thing is for sure - I will get a great feel for whether consumers are spending or not. I am taking the family to Disney World in an effort to get some late year R&R. Before you say it, (I know it), going to a place like Disney World is not going to be relaxing, but in my world there is nothing like the look on the face of my two boys when they see something new and wonderful. Disney World is certainly that if I remember correctly.

That means I won't have any columns for the next few days and I wanted to reinforce the view that the vast majority of the rally is behind investors for the time being and that a retest of the recent highs would likely be the last move even if marginal new highs are made. The fact is that the move off the lows began with a lack of sellers and some short covering and ended with people chasing momentum. That works until the momentum ebbs and most are stuck in losing positions. That changes the dynamic of any potential oversold rally.

The last two weeks of the rally sucked in the money that would have rather waited for a pullback to buy. The feeling of missing out caused more patient buyers to become aggressive buyers. That saps buying power on a dip and turns those potential buyers that chased the upside into sellers on any upside, as they get to breakeven. It is a supply and demand issue just like anything else. For example, the no interest loans drew in a lot of car buyers that would probably have waited to buy a car until the economy got better. So many rushed to get a new car before the deals went away that it may have created a problem for Auto makers down the road because who is left to buy?

From a technical perspective the market (as measured by the S&P 500 - SPX) has become oversold near-term, which likely means that there could be some level of stabilization and bounce back - again, a structural and not fundamental reason for stocks to move higher. Since the beginning of the move in October, I have been using the intermediate-term (weekly) indicators to suggest that the rally could last longer and go further than most thought. Until recently, the momentum was still moving higher. That is no longer the case as the market indices and its components have reached extreme levels of overbought and are now beginning to move lower. Again, it is important to understand that intermediate-term moves take time to develop and this one should be no different. The bottom line is that the market (SPX) has seen a peak in momentum, remains in a downtrend and is facing the same longer-term issues that led to prior declines, which have yet to be resolved.

I continue to believe that the perception trade is over and that we have entered the twilight zone trade before we get to the reality trade. The perception trade refers to the belief that things "have to get better because they can't get much worse" (October-Nov). The twilight zone trade refers to the period where the market loses its momentum, as traders get closer to grappling with earnings and economic issues (early to mid-December). The reality trade comes once we get into the heart of the earnings season and find out if earnings are tracking well and whether the forward looking statements from CEO's are any more encouraging than the past few quarters (very late December-January).
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