A Positive Start

By Scott "The Strategist" Fullman
January 7, 2002

Excluding the final day of the year, 2001 ended strongly, and that strength appears to be caring forward into the New Year. Negative performance on December 31 was likely the result of seasonal factors associated with year-end position adjustments. Excluding the last day of the year and Christmas Eve, the Dow Jones Industrial Average (DJIA) has risen for eight straight sessions (it was flat on Dec. 24). In total, the "Blue chip" indicator has appreciated 11 of the past 14 sessions. The broader S&P 500 Index (SPX) has also risen 11 out of 14, and the NASDAQ Composite Index (COMPQ) gained in 10 out of 14.

On Friday, SPX finally broke above its 200-day moving average. DJIA had broken its 200-day moving average only a few days before. This indicates a higher probability for sustained market growth. It is important to note that an index can easily reverse or fluctuate around this level for a period of time.

Investors have apparently shifted from safety to growth. This is evident partly by the weakness in the bond market, with the yields on the 10-year T-note and the 30-year T-bond holding above the 5% level. There is growing optimism that the economy might be turning, despite the weak holiday sales season. Technology shares, which usually lead market rebounds, have been very strong, with the PHLX Semiconductor Index (SOX) rising to 600 last Friday, on an intra-day basis. SOX was below 350 on September 27.

The PHLX Semiconductor Index (SOX) Daily Chart from September 1, 2001 to present

Figure I -- The PHLX Semiconductor Index (SOX) Daily Chart from September 1, 2001 to present. Note the sharp appreciation of the index from the end of September till last Friday.

INTERNAL INDICATORS
The many internal market indicators that we follow have been positive. This is an indication of the broadness of the advance. We also note that volume has been increasing and our proprietary money flow indicators have been positive.

Short-term oscillators are signaling overbought readings for many of the major market benchmarks and leaders. Additionally, the implied volatility levels remain low; also an indication that the markets are overbought, but have not crossed into areas that signal danger. However, a cautionary flag is apparent, a sign that investors and traders should consider the use of defensive strategies, such as the purchase of protective puts.

S&P 500 Index (SPX) Implied Volatility - Daily Chart from January 2001 to present

Figure II - S&P 500 Index (SPX) Implied Volatility - Daily Chart from January 2001 to present. Note that this indicator is at the Feb./Mar. lows and is nearing the July lows.

LOOKING AHEAD
This week companies will begin to report their results for the fourth quarter of 2001. Additionally, there are a few important economic reports, which could influence the movement of the markets. Investors and traders are expected to be watching all of the numbers closely, looking for a signal that the economy is turning around.

Since stock prices have risen sharply during the past three weeks, the probability for a correction is rising. Earnings time could be an opportunity for traders and short-term investors to take profits.

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