Navigating This Headline-Driven Market

 | Dec 01, 2012 | 4:30 PM EST  | Comments
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Market volatility is alive and well these days, with one positive headline out of Washington followed up by a negative one. The market didn't like comments by Senate Majority Leader Harry Reid on Tuesday. Then it liked what it heard from House Speaker John Boehner on Wednesday -- and it didn't like it what Boehner said Thursday. The verbal jousting continued Friday, but stocks closed impressively near session highs -- something they've made a habit of doing since the Nov. 16 lows.

Late Thursday, the White House proposed $1.6 billion in tax increases, $400 billion in unspecified entitlement program cuts and an unlimited debt ceiling. Republicans said it was nothing more than a rehash of prior budget proposals. A deal seems a long way off, so it's noteworthy that the market is holding up as well as it is.

Have you noticed that, in nine out of the past 10 trading sessions, major averages have closed near session highs? That is definitely a good sign for the bulls, but the story remains the same: It's hard to be long or short with conviction. During times like these, when uncertainty is rampant and whipsaw action is commonplace, doing nothing tends to be a good idea. But the fact remains that the market trend is up until proven otherwise.

Mr. Market isn't making it easy, though, as it flashes mixed signals about its underlying health. On the one hand, the major averages flashed a buy signal exactly one week ago, with solid percentage gains on the fifth session of its rally attempt that started Nov. 16. On the other hand, we saw a higher-volume decline Tuesday -- not a good sign in the early stages of a rally. It was mild distribution, but distribution nonetheless. Still, the overall action in growth stocks has been pretty good. The market has served up its fair share of technical breakouts, and that is a critical element of any sustained rally.

Overall, the Nasdaq Composite's recent price action has been encouraging since it hit a low of 2810 -- the index has risen in eight trading days out of 10, with closes at or near session highs. But the tech-heavy index is sitting just underneath a possible resistance level at 3024 -- its 50-day simple moving average. This level could be a ceiling in the near-term. The S&P 500 is in a similar boat, with potential resistance at its 50-day SMA at 1421.

Some short-term softness in the market wouldn't be surprising, but recent price and volume trends in the major averages say the chances are still pretty good for a rally into the end of the year. Overall, it's OK to embrace the nascent rally, but it doesn't necessarily have to be a warm embrace. It's too early to aggressively commit capital, but it's OK to nibble at few long positions and see how they work.

I've nibbled at some stocks in recent days, including HDFC Bank (HDB), eBay (EBAY) and Mednax (MD). So the far, the market is telling me that my timing was right, though I'm in no rush to buy more shares at this point. Still, if the indices show higher-volume gains and lower-volume declines in the coming days, I'd expect what I currently own will continue to work, and new buys will continue to present themselves from our Ultimate Growth Stocks watch list.

**Ken Shreve got his start in the financial markets with Investor's Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its website Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. He continues to provide market commentary on national radio and has appeared several times on CNBC. He now hosts Breakout Investing Monday through Friday from 3-4 PT on TFNN.

You can learn more about my newsletter here. For a sample copy, email me.

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