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Will Bulls or Bears Control Holiday Season Trading?

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While both sides can make strong cases, the pricing action will be the final arbiter.

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Thin trading environments and short holiday weeks typically favor the bulls. A festive mood permeates the action, which in turn pushes sellers to the sidelines and gives traders the opportunity to chase after (and often create) small pockets of momentum. Headlines about a military skirmish in the Korean peninsula and widening credit default spreads in Spain and Portugal, however, dominated the action and gave us some unusually choppy action around Thanksgiving.

The net result was that the indices have, over the past couple of weeks, carved out some fairly narrow trading ranges. Whether or not these short-term lateral channels wind up being a way for the market to work off some oversold conditions before heading lower once again, or if the market is simply in the process of digesting its September/October gains, remains to be seen.

On the one hand, the bears will tell us that much of the move off August lows was predicated on a collapse in the US dollar, which in turn was driven by the expectation of a flood of liquidity from the Fed. Although no one outside Dr. Ben Bernanke's circle of enthusiastic economists truly felt that another round of quantitative easing would actually end up benefiting the economy, it was sufficient to devalue the buck enough to artificially drive asset prices higher.
In addition, they'll point to the reflexive move to fresh highs in the indices after the Fed spelled out the details of QE2 as a capitulatory event that has turned out to be a classic bull trap. The sell-the-news reaction took a couple of days to play out, but it eventually broke to a steep rising support trend line that had been in place throughout September and October.

On the other hand, the bulls will point out that, while the overall action hasn't been stupendous over the past few weeks, the indices have yet to take any serious technical damage and the broader trend has yet to change. Financials certainly are an area of concern, and strength in the greenback has put a damper on the resource sectors. But with materials and energy just 5% and 3% off recent highs respectively, those groups are simply doing a good job of consolidating recent gains.

Besides positive seasonality, meanwhile, probably the biggest feather in the bulls' cap right now is the performance in market-leading stocks. Names like F5 Networks (FFIV), Amazon (AMZN), Chipotle Mexican Grill (CMG), Netflix (NFLX), Salesforce.com (CRM), and Riverbed (RVBD) have been acting as if they don't have a care in the world, and (by the way) retailers and semiconductors have consistently shown a good deal of relative strength. Buyers will also be quick to point out that, from a longer-term perspective, the S&P 500 could be in the process of developing a large cup-and-handle pattern which, if confirmed, could lead to a significant move to the upside.


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We'll just have to see how things go. The good news for us as individual investors is that we aren't required to formulate some overarching thesis, place our bets, and convince ourselves that we're right regardless of how the proverbial cookie may crumble. This current trading range gives us the chance to sit back and watch to see which side prevails. Both bulls and bears have some good arguments, but the pricing action will be the final arbiter.

Keep those time-frames short and maintain a disciplined approach. We can look for trend trades to develop once the market gods decide how they're going to resolve this current trading range.


No positions in stocks mentioned.
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