HOTS Weekly Commentary

Discussion in 'Trading' started by Fari Hamzei, Dec 13, 2005.

  1. To all HOTS Subscribers:

    The market has entered into a consolidation mode over the last two weeks, which appears to be a logical pattern after an impressive November advance. Despite some longer-term concerns, there is very little evidence supporting a major top at these levels and at this time of the year. The Fed announcement this Tuesday, as well as expiration forces, will most likely produce a move out of the consolidation mode by the end of the week. Internals are supportive of at least one more advance to higher highs for this market, and this week could be the right time for this to happen. With respect to the S&P 500, 1250 (plus or minus a few points) remains an important support zone, while 1275 – 1280 should represent resistance. The Dow Jones Industrial Average is barely positive for the year, and my expectation is that institutions will attempt to push it higher (at least to 11,000) before year-end. I believe that even if the Fed language is not friendly for the market, a possible sell-off will be contained and will last no more than a few hours, whereas a friendly Fed may create an open invitation to celebrate Dow 11,000. Also keep an eye on the Midcap index, which continues to lead this market higher and shows no signs of reversing.

    MDY (Mid Cap ETF) weekly:

    [will be added by Baron shortly]

    Dennis Leontyev
    Options Strategist and Editor
    HamzeiAnalytics Options Trading Service (HOTS)
  2. Baron

    Baron ET Founder

    Here's the chart:
  3. To all HOTS Subscribers:

    As I mentioned numerous times over the last couple of months, the primary reason for market strength has been seasonality. Buying based on performance anxiety associated with year-end bonuses is a primary driver of rallies occurring in November and December. Markets go up and down on perception of the future, and when the most perceptible image for portfolio managers is that of a bonus, the strength usually ends with that bonus. Guess what? We are entering bonus time. Therefore, portfolio managers need to find a better justification in order to buy stocks.

    Justification is not such an easy task given: 1) market internals have been deteriorating for weeks; 2) there is no true leadership; and 3) as I suspected, NASDAQ and small cap stocks are already lagging badly. The short-term picture remains mixed (once again due to seasonality), and churning back and forth into the end of the year would not surprise me at all. I expect any advance (if it occurs) to be narrow and led by the DOW because it is the most narrow of the major indexes. We are in a classical case of the last leg of a bull market where most stocks have already entered a bear market, while major indexes are desperately holding. It looks almost identical to December of 1999 in that respect.

    On the following chart NYSE Composite with the number of NYSE stocks trading above their 200-day moving average (courtesy of, note that every new high in the index is accompanied by a diminishing number of stocks participating. Longer-term bulls need to convince me that this is healthy. In my book, this is as bad as I have ever witnessed.

    NYSE Composite with number of stocks above 200-day MA:


    Dennis Leontyev
    Options Strategist and Editor
    HamzeiAnalytics Options Trading Service (HOTS)