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Comfort is In Going Into the New Year


Hey, it's the holidays...what's not to feel good about?


I've posted a few tidbits lately that have suggested that traders are quite comfortable with how prices have been holding. Not necessarily speculative, but at least comfortable. Depending on the circumstances, though, comfortable is not necessarily a good thing.

Let me give you another example. As of yesterday, traders in the Rydex series of mutual funds had become enthusiastic about enough sectors that 91% of all funds that they offer had assets that were trading above their 50-day moving average. That tells us that these traders are counting on a continued broad-based rally. Contrast that to this past August, when only 10% of funds had assets above their 50-day average.

Over the past five years, there have been six other occurrences of such "comfortableness". In keeping with the market maxim that being comfortable is only a temporary condition, 10 days later the S&P 500 was lower each and every time (this includes four instances since 2003). On the upside, the average maximum gain the S&P was able to enjoy from that point was +1.1%, while the average maximum drawdown was a pretty robust -3.5%.

As we all know, the next 10 days include several that have shown a very strong historical tendency to be positive. Despite the appearance that "everyone" already knows this, I hesitate about being too contrary and betting against it. But I do think that should equities in general hold up through the end of the year, there will be a time of reckoning by January at the latest when we get a 3% - 5% whack within a two-week window.

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No positions in stocks mentioned.

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