Morning Market Comment - November 18, 2009

Good morning...We begin the day with flat pre-market futures after some early gains were erased after a worse-than-expected housing report.

The most-cited excuse for a bullish bias that I've seen lately is that we have some extremely positive seasonality coming up. The period between Thanksgiving and Christmas is one of the most consistently positive of the year, and the market just doesn't decline during that time period.

I'm not a huge fan of seasonality and tend not to discuss it too often unless something really sticks out. Holiday seasonality is one of those times, and it's certainly true that the market tends to rise before them, particularly at the end of the year.

But it's best used on a shorter-term time frame. The market can - and does - decline between Thanksgiving and Christmas...sometimes violently. As usual, let's just look at the facts.

The chart below shows the performance of the S&P 500 from the day before Thanksgiving break to the day before Christmas break. The red lines show the maximum drawdown (i.e. loss) that the index suffered at its worst point between the two dates. The green line shows the maximum gain the index enjoyed during that time. And the black line shows the end result.

Overall, 64% of the years sported a positive return between the two holidays, with an average return of +1.1%. But there were some drawdowns in there, as bad as nearly -11% (in 1980).

On average, the S&P suffered a decline of -2.5% between the holidays, while its maximum gain averaged +3.2%. That's a positive ratio, but it's probably a lot less than most people think.

There were 8 years when the S&P was trading at a new 52-week high heading into Thanksgiving. During those years, the period between then and Christmas was positive 5 times with an average return of +0.6%. Drawdowns averaged -2.0% while gains averaged +2.6%. That's not markedly different from any other time.

Pretty much the same story here, if not a little worse. 61% of all years were positive, with an average return of +1.0%.

The worst drawdown was -17.0% in 2000, but that was of course atypical. The Nasdaq suffered a letdown of -3.4% on average during the two holidays, while it enjoyed an average maximum gain of +4.1%. Again, a positive ratio, but not exceptionally so.

When the Nasdaq was trading at a new high at the time, then it was also up 5 of 8 times between the holidays. The average return was +1.9%, with a drawdown that averaged -2.6% and maximum gains that averaged +3.7%. Again, not much different than usual.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend:	The S&P has a rising 200-day average and a series of higher highs/higher lows
Support / Resistance:	The breakout to new highs has held (so far). 1120 is a popular projection of resistance, and 1150 after that
Other Tendencies:	Pullbacks after highs have been positive, but we've seen some "toppy" kind of behavior

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration, or possibly even a new bull market. During April and May, we went over several studies that suggested that "this time is different" in terms of bear market rallies, as we reiterated in early May.

Since July, the market has consistently rallied smartly from the shortest-term oversold readings, as a healthy market does, and it has rolled over almost all hints of bearish conditions. That kind of momentum tends to persist for long periods of time.

We've seen some periodic bouts of excessive optimism along the way, and the market has pulled back in the very short-term after them. But each time, the major indexes have held technical support, and rallied from even intraday oversold readings, so we've seen little change in the uptrend's character.

Over the past few weeks, we'd seen a few modestly convincing studies that show some cracks in the uptrend's potential. We were getting some very volatile swings in breadth, a deterioration in the number of stocks rising along with the market, a number of big reversals after tests of recent highs, and a hesitation to rally from short-term oversold readings.

All of these were warning signs, and the S&P subsequently broke the uptrend line from March. However, during the recent correction we also saw investors quickly switching to the "excessive pessimism" side of the ledger, and the market convincingly bounced back. That's very healthy behavior, and if the S&P can hold above 1100 for more than a day or so (so good so far), then there will be little to complain about regarding its performance.

Signal Strength Breakdown	Notes
Sentiment: to	Our shorter-term indicators are mostly neutral
Trend:	The S&P has hit a new high and held
Support / Resistance:	Former resistance at 1100 now becomes potential support from those who missed the breakout
Other Tendencies:	Nothing notable

Yesterday didn't really resolve much with its small trading range and light volume. Turnover will certainly decrease as we approach Thanksgiving, but this seems a little early to see such a drop-off.

The good news is that prices were able to hold the new highs despite some early weakness, and we didn't really become any more overbought than we already were. That's about as much as any bull could ask for - you don't want a decline and question of a "false" breakout, and you don't want so much upside that it creates overbought conditions and (likely) quick selling pressure thereafter.

I have no desire or intention to aggressively fight the uptrend as long as we see this kind of behavior. The only ways I'd be willing to press shorts would be evidence of a false breakout if we trade back below 1100, or enough of a push higher to generate another round of overbought extremes.

Yesterday I mentioned that our Indicators At Extremes had reached 0% bullish (for the market) and 27% bearish (it dipped to 25% as of yesterday's close). That's close - but not quite to - the levels that have preceded other multi-day corrections since the March low. The best bet for a correction would be a push higher that generated more than 30% bearish extremes, the day before the Thanksgiving break (following option expiration which has coincided with the three prior short-term market peaks), and into probable resistance around 1120. For now, neither scenario is valid so I see little reason to bet against the market yet.