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"Traders: Don't Believe in Santa Claus"

 
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PostPosted: Fri Nov 25, 2005 3:21 pm    Post subject: "Traders: Don't Believe in Santa Claus" Reply with quote

RealMoney by TheStreet.com
Traders: Don't Believe in Santa Claus
Friday November 25, 10:00 am ET
By Harry Schiller, RealMoney.com Contributor

Yes, this market represents a brand-new ballgame, but that doesn't mean it goes up forever. It just means that we are now looking at some different milestones to guide us along the way.
The trigger points for higher highs were easily achieved late last week as the S&P 500 blasted above the 1240-1241 level. I had figured that a move through that level would likely lead to a return to the prior highs and the filling of the gap at the 1254 level. Granted, I really wasn't expecting a move to new highs until after Thanksgiving. The fact that the market made new highs before Thanksgiving is just another indication of how extended this market is.

How overbought is the market? Extremely overbought. The McClellan Oscillator closed on Wednesday at a bloated +160, which marks one of its most overbought readings of the past couple of years. In addition, by historical standards, according to some indicators, the market is pushing extremes.

For example, Peter Eliades of Stock Market Cycles points out that the longer-term Open-30 TRIN closed Tuesday at an overbought 0.87. He explains that this is the most overbought reading in this indicator since March and April of 2000 when the Nasdaq Composite and S&P made their all-time highs. Obviously that wasn't a good time to be buying stocks.

Not only is the market stretched, but sentiment indicators are again warning that too many bulls have embraced this rally.

The chart of the VIX below continues to warn of some trouble ahead. No official sell signal just yet, but we're getting close as it has now taken out the recent Sept. 16 low of 11.07. Now the only numbers of significance ahead are the July 20 lows of 9.88 intraday and 10.23 on a closing basis. I would rate new lows on an intraday and closing basis as an official sell signal in this indicator, and one that warrants considerable attention, given the record of this indicator when it scores new lows.

For now the VIX, shown in this chart courtesy of OptionsXpress, is warning of a near-term top. It isn't giving us a sell signal yet, but it is suggesting caution.

Overhead Targets Within Sight
First, as you can see in the chart (below) of the S&P Futures, this index is now closing in on levels last seen in May 2001. That was a significant level for the S&P, as it has marked the highwater mark ever since. Furthermore, the market didn't just sell off from there, it collapsed below the 800 level by late 2002. So this level was a big deal.
Adding to the current parallels, earlier in 2001 the S&P had plunged to the 1100 level. This level then became important support for the launch back up to the 1300 level that soon followed. As you can see, it was almost a vertical recovery to the May 22, 2001, high of 1316.

By contrast, this latest recovery off the 1100 level took almost all of 2004 to complete. In fact, the S&P broke below the 1100 level four times in 2004, and each time a sharp rebound back above this level followed. So again it became important support for the subsequent recovery. Now the market appears to be heading back up to the same area that turned it back in 2001. The question is, will the S&P stall there again and be turned back? Or will it bust through this level and just keep on going higher?

For now, with favorable seasonality in effect through the remainder of this holiday-shortened week, and through next week as well, we should allow for a continued move to higher highs. But I am betting that this 1316 level of the cash (or 1318 in the futures) stalls the market, at least for a while. That level should be best case over the near term, and in fact it may mark the top to this advance.

Assuming it gets to these higher levels, I wouldn't expect it to just go straight up. The market is now at a juncture where some pretty good setbacks should be expected along the way, even if 1318 (in the futures) is in the cards. In fact, over the near term, I wouldn't be surprised to see a retracement to the area of the prior highs. In the S&P Futures this means that another pullback to the 1254 area might be expected. It may not happen over the next few days, but odds of such a pullback occurring are better than good.

Bigger picture, I am betting that this area above the 1300 level at least stalls the current advance, if it doesn't stop it. But what if it just pops through and keeps going?

Keep in mind that in early 2000, about a year before that plunge to the 1100 level, the S&P was trading well above 1500 at its all-time highs. This suggests that perhaps, if the 1316 level doesn't stop this advance, the S&P has a shot at returning to the 1500 vicinity.

Meanwhile the Nasdaq-100 (NDX) appears to have its sights set on its post 9/11 highs achieved back in December 2001 (following the meltdown on 9/11). As you can see from the chart below, the NDX topped out on Dec. 6, 2001, near the 1735 level. About a month later it made a lower high at the 1710 level. From there it collapsed to new lows, losing over 50% of its value from those December highs.

But it is now those highs that seem to have the market's attention. It's not that the NDX cannot move higher, maybe significantly higher, but for the near term, this area, call it 1710-1735, should provide some pretty good resistance to the advance in the Nasdaq.

Oh, there is one other number to be on the lookout for. That of course is Dow 11,000. With all the hoopla likely to accompany a move to this level, we should see a pretty good pullback follow the first pop to or through this big round number. Ultimately, Dow 11,000 will likely be taken out. But I look for the first attempt to fail and to be followed by a tradeable decline.

Wednesday's high just shy of 10,951 may have been close enough for the moment. A quick 40-point pullback to the 10,910 level followed in the final hour, as apparently there were too many bets already placed on an imminent assault on Dow 11,000. Whether it happens this week or next, odds are good the much heralded pop through Dow 11,000 will happen. But I suspect that when it does, rather than being the sign of a new bull leg beginning, it will be the sign of the last buyer buying.

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At the time of publication, Schiller was short S&P Funds and short NDX Funds up to 20% levels, although holdings can change at any time. Dr. Harry Schiller is owner and editor of the Short-Term Consensus Hotline. He is a stockbroker and options principal with brokersXpress, inc. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks.
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