Stock Market Analysis

Tuesday, December 28, 2010

Santa Claus Rally Dying?

The Dow closed marginally higher by 20 points today in yet another mixed trading day amidst better than expected economic data.

Fundamentals
The US market closed mixed today yet again in yet another lightly traded day. Both the Dow and the S&P500 posted marginal gains while the NASDAQ composite posted marginal loss. Despite far better than expected retail sales data and a better than expected investor confidence number, investors continue to be slow and reluctant today as trading volume remained low with an extremely small range of movement. What is encouraging is that even though job data wasn't too encouraging so far, consumers posted the strongest holiday purchase since 2006. Yes, consumers are the backbone of the US economy and as long as consumption picks up, everything else can. And yes, even jobs can return with stronger demand in the market as companies and factories step up production to meet those demand. The next bout of significant economic releases will be made on Thursday with the Jobless Claims and Chicago PMI as the highlight (see Stock Market Calendar).

Technicals
The Dow continued its slow climb today as the Santa Claus Rally continues. However, a significant loss of bullish momentum along with a short term bearish divergence turned up on my short term momentum indicators today which seems to suggest that even if this bull run last through New Year, we might still not see the "January Effect" of old. Traditionally, January has always been thought of as positive months with plenty of academic research supporting the theory but the "January Effect" really hadn't been the norm as Januaries closed significantly lower than the prior December close in most years over the past 10 years. Even those with a January gain posted insignificant ones as profit taking set in on the bullishness very quickly in the month of January itself. Indeed, when an anomaly gets so well publicised and studied, arbitrageurs and their algorithms start coming in to eradicate the anomaly.

For now, the Dow remains in a short term bull trend, intermediate bull trend within a primary bull trend.
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