MARKET STARTS LAST WEEK OF 2005 ON WEAK NOTE -- WORRIES OVER NEGATIVE YIELD CURVE
THERE MAY BE NO SANTA CLAUS THIS YEAR ... In case you're confused about what the traditional Santa Claus rally is, it's the tendency for the market to rise in the week between Christmas and New Years. Judging from today's selling in stocks, there's a strong chance that Santa won't be doing much for the market this year. The fact that the market is weakening isn't much of a surprise. I've written a couple of recent articles on the noticeable deterioration in market breadth figures (December 16, 2005). Not only has the NYSE advance-decline line failed to confirm the last move to new highs by the S&P 500, but the last week saw more NYSE 52-week lows than highs. I also suggested last week that December sector rotations showed a more cautious market. Because of those negative warning signs, I've been recommending some stock trimming as the year draws to a close. I had been hoping for one last upward gasp and an opportunity to sell into strength. It's now doubtful that the market is going to be so accommodating. Even a sharp drop in energy prices failed to help. Natural gas fell 10% to a three-month low (Chart 1) while crude fell 88 cents to $57.55 (Chart 2). Crude is back below its 200-day line. Energy stocks were the market's weakest group. Falling energy prices boosted the airlines. Gold benefited from falling bond yields.
Chart 1
Chart 2
POSSIBLE YIELD CURVE INVERSION ... At one point today, the yield on the 2-year T-note touched the yield on the 10-year T-note which hasn't happened in five years. That has intensified fears of a negative yield curve which occurs when short-term rates exceed long-term rates. A negative yield curve is usually a sign of economic weakness. That caused some selling of stocks today and some bond buying. Chart 1 shows the 7-10 Year T-Bond iShares rallying to a new three-month high. Bond yields (which move inversely to bond prices) fell a corresponding amount (Chart 2).
Chart 3
Chart 4
S&P 500 SPDRS WEAKEN ... The next chart shows today's selling in the S&P 500 SPDRs (SPY). Three things are worth noting on the daily chart. The 9-day RSI line is threatening to break the 50 line which would signal lower prices; the daily MACD lines are still negative; and the SPY is closing beneath its 20-day moving average. Although it's not shown here, today's selling was also accompanied by heavier trading volume. The next area of chart support is along the August/September highs at 123.56 and the 50-day average. Time appears to be running out on the yearend rally.
Chart 5
DOW STILL STALLED BELOW SPRING HIGH... Chart 6 shows the Dow Industrials still trading below the spring high at 10984. It hasn't suffered any serious technical damage so far. But we're watching it closely to make sure that it doesn't. Chart 7 is a point & figure version of the same chart. I'm showing it here because the p&f chart gives more precise buy and sell signals than a bar chart. A buy signal is given when x column (up prices) exceed a previous x column. The last p&f buy signal occurred in October at 10450. To resume the p&f uptrend, the Dow would have to hit 11,000. A drop to 10700, however, would constitute a p&f sell signal. [A sell signal occurs when a o column (down prices) breaks a previous o column]. That would put the Dow at the lowest level in more than a month and would threaten its 50-day moving average and its summer highs.
Chart 6
Chart 7
