HOTS Weekly Options Commentary (Issue #39)
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 decisionpoint.com), 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
HOTS Strategist and Editor,
HamzeiAnalytics