A Stockmarket Update - Is A Mega Christmas Rally Brewing?
Both the UK and US Stockmarkets have been pretty lacklustre over the last month, just holding their gains made over the last two months with sideways movement. But in our view, while the bull market is still very much intact the fact that the American Broker/Deal Index (ticker XBD) which has been the foundation of the bull market has not made it to new all time highs is somewhat worrying, at least in the short term.
The fact that the XBD is not confirming the general market by moving to new highs is far too weak a signal to suggest a top in the market but it does at present show that the internals of the market are not as strong as they look. This is the reason we sold 25% of our holdings last month - see the October issue for more details.
But matters could change very quickly, literally within a few days, as our old friend the XBD is coiled tightly just below the old high of 240.12. Long time readers of the Newsletter will remember that we wrote a piece in the March 2005 issue which argued that breakouts (or breakdowns) usually work a lot better when the market is not overbought as in the case right now.
What is Overbought - It is where prices have moved too high too quickly. Prices in effect get too far ahead of themselves so usually have to fall somewhat before moving higher again. Oversold is the reverse of this.
A Possible Christmas Rally
The mood in both the London and New York markets among workers seems very positive at the moment. So positive in fact that it just doesn't seem in their interests to rock the boat and split what looks to be another bumper payday. The fact that stocks were able to rally back from their depressed summer lows also adds to the positively. So the chances of a spectacular Christmas rally do seem very high. So will there be any clues that a monster rally is about to take place? Normally the start of any large rally (or decline) in any market is characterised by one or two days significant price action, and here are two possibilities we're looking out for -
- The XBD should explode through the 240.12 level on high volume
- Amazon.com should also explode on high volume through the important $40 level (now $38)
Why Is Amazon.com Important
Amazon.com is a stock we've long followed and is certainly one of the bellwethers of the technology sector. Unless the company gets in deep financial trouble it's hard to see any advancement in the general technology indexes without the company's share price participating.
But 2006 hasn't been a particularly good year for the company with the shares starting at around $50 before moving steadily lower. Then in the summer it released bad financial figures which led to the smackdown to $26, basically a 50% loss for the year.
Since the summer lows the stock has climbed steadily higher before rocketing on immense volume (which possibly is the key to all of this) to stand today at around $38-$39. Expect some short term resistance between $38 and $40 but we think if it breaks $40 it could turn out to be a seminal event leading the whole technology sector strongly higher towards the end of the year.
What possibly is the key to all of this is the fact that the market will have seen such an important technology stock rally 70%+ off it's lows and possibly nudging the old highs for the year (around $50). They'll look at that and argue that it's proof that the internals of the market are very strong. Sort of like a Football team in the 2nd Division that is in the relegation zone at Christmas but come summer it's pushing for promotion - that kind of momentum is hard to ignore by anyone with an interest in football even if you don't follow that team or League.
And if Amazon.com starts to explode coinciding with the XBD breaking out to new highs we believe the chances of a Christmas mega rally will be better than 70%.
Summary
Remember, although we always tend to analyse the US markets the majority of our investing is done in the UK market. We just feel the US market is less hard to analyse and anyway UK stocks are never going to move significantly without American prices first confirming.
We are most probably wrong to have sold 25% of our stock portfolio but we didn't like the fact that the XBD was attacked so viciously earlier in the year (it was knocked for 22%), plus right now it hasn't breached new highs. We also needed the money to add to our gold holdings and buy into the online Gaming sector - see last month's newsletter.
We however are still finding it hard to buy stocks at these levels because so much of the economy to us seems wrong. But that most probably means buying is the right decision using the faithful and very reliable trading rule of 'doing the hard thing is usually the right thing'.
