Stock indexes start off the first day of the New Year with a a continuation of the up-leg that started on the first of December. Much is made of the price action on the first day of a new year. I was at the gym today watching CNBC, thankfully with the sound off, and noticed they were showing percentage moves on the first day of the year going back many years, and then drawing some kind of conclusion, or hopeful correlation to where the market would end on the last day of the year. This, of course, is quite silly in the same sense as forecasting the market based on super bowl wins or hemlines. But the market movement has been quite impressive if you don’t look at volume, breadth, various divergences, the economy, housing, progressive politicians, and on and on. Markets are known to climb a wall of worry, and there seems to be more worry than normal, at least for those who read the news, but none of this apparently is of concern to momentum traders who must be on a bandwagon. Sometimes trends exist based on their own momentum without the need for a positive backdrop. Some will argue that the backdrop is positive because all that matters is rising earnings, regardless of the reason or durability of those rising earnings, and many earnings are rising. My gut says that much of this rally is traders not wanting to be left behind, especially when there are few choices where to park money in this low interest rate environment.
One thing that seems obvious is that this market needs some sort of pullback, or at least a rest. Many are starting to call for this and say they are ready to buy after a decent pullback. As long as the trend remains up that would be the logical thing to do. But one would probably be better off not reading the news. As bullish as everything looks I still must look for signs that the crowd might be wrong and the correct trade might be in the other direction. That’s probably the curse of being a contrarian. Much has been made of the declining volume during the December rally. But December always has a drop off in volume for obvious reasons. I place more weight on divergences between correlated markets. Small caps have been quite strong and seem to have a mind of their own, but I think a more important correlation exists between the S&P and Nasdaq. Many market turning points in the past have been accompanied by divergences between these indeses. You can see the nice positive divergence between the S&P and Nasdaq that occurred leading up to the December rally. I have little red lines drawn on the above chart to show that. This divergence indicated a continuation rather than reversal. Momentum had been stronger on the Nasdaq from the lows last August, but did start to slow down a bit relative to the S&P during the December rally. It did appear almost to be rolling over prior to the gap up today. Now they both seem to be in gear to the upside, but I’ll be watching closely to see if any divergences show up between these markets in the days ahead. A broader divergence could develop despite the action today, especially if the Nasdaq should fall below the moving averages, which are closer together than those on the S&P. So far there are few clues that this market will ever go down, but that could change quickly.
The gold market has also been quite strong lately and has still been grabbing lots of attention and is being well advertised. It has carved out a very well defined three-drives-to-a-high pattern, and is now trying to negate that by driving to a fourth high. Although this time there is some weakness between the price of gold and the price of some of the gold miners. I know there are many who claim that gold mining stocks no longer correlate to the price of gold because of rising mining costs, environmental wackos, new etfs, etc. I still look at divergences between gold and companies that mine the stuff. The chart of Agnico-Eagle (AEM) shows a striking example of such a divergence. This particular stock has diverged more than most. The broader indexes of miners and many other gold stocks are more subtle in this divergence. But it is interesting at a time when almost everyone, including establishment analysts who never followed gold, are now universally forecasting gold to be much higher in the months ahead, at the same time many of the shares of companies that mine gold are not following the price higher, and some like AEM seem to be entering downtrends. I’m still bullish long term and am still holding most of my core position in ABX and a few others, but the relentless bullishness is worrisome, and I think more of a worry than what would be considered a normal wall of worry.
I do hope to be posting on the blog on a more regular basis. I’ve said this before. It’s difficult to find time. Part of the problem is that most of my analysis is geared toward Market Profile and option spreads, and I’m not sure if enough people are interested. Maybe that doesn’t matter. I should just write as if keeping a trading diary, which is what the idea was when I started this. I may move this blog more in that direction in the coming year.