Marketwatch: Dow Approaches 2011 High; S&P May Still Have a Little Room
Posted by admin on January 27, 2012
Today the Dow closed at 12734.63, only about 150 points away from last year’s high of 12876 reached in May (click to enlarge):
Meanwhile, the S&P closed at 1318, with a little bit further to go before it can reach last year’s high of 1371 reached in May also (click to enlarge):
So the question is, where to from here? Personally, I think there is still a bit of room left in the markets. Still, as a practical matter, it’s good to be fading positions with profits and thinking about buying into defensive positions. Let’s discuss a bit the logic behind this opinion.
First, general technical indicators have not clearly reversed. They may have started to, but there is not yet evidence that the reversal is within the next couple days. My guess is we’re beginning to turn, but the process will take at least a couple weeks, if not more. I think the most likely scenario is a small pullback and another push, but of course, we must be open to a clear reversal (which could be sparked by Greece if debt talks there fail), or a period of sideways movement before a more definitive direction is established.
For the moment – meaning the next few days – the VIX remains low, bonds are up but only slightly, the Dow Jones Transports is also a little distance from its 2011 high (5308 today vs. 5627 last year) and many stocks are just above their 200-day moving averages. My simple – albeit far from perfect – rule of thumb for the next few days is to sell anything with a significant run and a decline in the last day or two; and to consider holding stocks that have been in an uptrend and have declined much less than the market.
While in the background, Europe remains a cloud over our heads. If debt talks conclude successfully, then we could have a catalyst for a little bit more in the rally. Of course, a failure would weigh heavily on stocks. For the moment, I lean toward a positive resolution. Also, last week there were rumors of a resolution in the lawsuit by the states against the banks. Apparently, the President wanted to be able to announce a conclusion at the State of the Union address this week. Now that deadline has passed, those rumors have faded. However, any resolution would bring clarity and an upward push for the financials. Finally, the bulk of the good earnings news is out, so we come to a period where other headlines, such as Europe, may come to dominate the media.
Finally, a quick note. In both 2010 and 2011, we had a small rally at the beginning of January, followed by a pullback, then another push upward, and then a final downward turn. In 2008 and 2009, the market started off both years headed downwards.
As I mentioned in my January 22 post, it is good to plan ahead and look at defensive positions, including:
- buying VIX calls
- buying the TLT
- buying defensive names, including dividend paying stocks
- buying puts or the short ETFs
We can also add buying utilities and the more aggressive call of shorting Europe to the list above.
Filed Under: General