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Is the Bull Market Worn From Battle?

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Bears are sharpening their claws, ready to break this market during the thin holiday trading.

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Market remains range-bound as the S&P 500 can neither pierce the 1120 level nor break below 1090 for the past 15 trading sessions. That has allowed volatility, as measured by the VIX, to sink back to the 21% level which is close to the 18-month low.

But some internal measures should give bulls pause before they assume this sideways action is a pause before another leg higher. Volume continues to be abysmal and is likely to further diminish as holidays approach. Of more concern is notable dissipation of any discernable market leadership.

The generals that led the charge -- Apple (AAPL), Amazon (AMZN), Goldman Sachs (GS), Google (GOOG), and flank commander Priceline (PCLN) -- are looking fatigued.

The charging battalions of the commodity sector have also lost their get-up-and-go momentum as oil and gold have given up substantial ground, and even the agricultural names such as Potash (POT) and Mosaic (MOS) have found their advances ground to a halt.

I'm no Dow theorist so not sure if it's a good thing that transports, notably airlines such as Continental (CAL), United (UAUA), and Southwest (LUV) have become outperformers. Lower fuel prices can only take you so far. To twist an old phrase, "It would be better to have higher price demand and hedge the margins than to have never flown at all." Basically, I don't want to be bullish on a market in which a money-losing industry is considered one of the better investment opportunities. (See also, Airline Stocks Ready for Takeoff)

If the market can't make a decisive move above the 1120 level early next week, this recent pause may be reason enough for the bears to brandish their paws and try to aggressively break this market during the thin holiday trading. And with decent profits in their pockets, the bulls might not want to enter the ring and decide to just call it a year.

Behold the Dollar

Of course, so many of these market moves are linked to the dollar.

The reversal in the dollar from a few days ago seems to be luring more traders looking to catch a major turn in the trend. This morning a massive block of 223,000 of the US Dollar ETF (UUP) March $23 calls traded in what looks like an opening purchase.

A similar large purchase occured in early November just prior to word that the UUP would temporarilty halt the issuance of new shares, which created a short squeeze and dislocation of the ETF from the cash markets.

See also, Dollar Is Key for Markets in 2010.

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No positions in stocks mentioned.

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