Counting On Consolidation

 | Dec 01, 2011 | 8:38 AM EST
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"Rest: the sweet sauce of labor."

-- Plutarch

Now that the S&P 500 has jumped over 7.5% in the last three days, the big question is whether this is an uptrend that will gain further momentum or just a big bounce that will trap overanxious bulls who chased the move.

Market players have been extremely gloomy and underinvested recently, which set the stage for a big move when we were suddenly hit by positive news out of both Europe and Asia. Many are still very skeptical of the situation in Europe, but the market insists on celebrating every news event about any European solution to such a degree that you can't just ignore it. Even if it turns out that the latest news is not as good as it appears, you can bet that we'll have some other positive event very soon.

My thesis has been that the combination of skepticism, poor positioning and positive seasonality should set us up for an upward bias into the end of the year. In addition, I'm looking for a repeat of the he low-volume V-shaped moves we had in October and last December. The market keeps finding ways to trend up despite all sorts of negatives, and I think the chances of climbing a wall of worry like that again are quite high.

In the near term, we have to be looking for some consolidation. We have moved too big too fast, and bulls (who were trapped) and short-term traders (who caught the move) have to be thinking about locking in some gains. We have overhead resistance to deal with, and, even though the point move was big, it didn't have a lot of energy.

If you just listened to the talking heads in the media recently, you would think that everyone is celebrating this huge move. The truth is that it has not been an easy market for most, especially if you are not a buy-and-hold type. The vast majority of this move occurred overnight, so if you weren't anticipatory and buying into weakness, you never had much of a chance to jump in. Even if you were highly reactive as the strength developed, there wasn't much meat left since the majority of the move was completed by the time the market opened.

One thing I find quite notable recently is how much complaining there is by traders who focus on stock-picking. There has not been any clear leadership, themes or pockets of momentum in this market. It has all been highly correlated movement, and the way to play it was to simply focus on direction and look for vehicles that have high beta. Speculative trading of individual stocks has been extremely tough.

The big danger with individual stock-picking is that even if you have a good pick, there isn't anything with relative strength. If the market rolls back over, the good stocks you bought are going to go with it. There is no safe place to hide. We are the mercy of overall market direction, which is fine if you want to play index ETFs but quite frustration for stock-pickers.

I'm looking for some near-term weakness as we digest the recent gains. We'll see what the dip-buyers do, but, hopefully, a few days of consolidation will give us some better technical conditions with which to work. I don't believe we are going to roll over and quickly fall apart, but I don't know how folks who caught this move can resist taking some profits.

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