No Time to Buy

 | Dec 02, 2011 | 3:30 PM EST
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The market has come a long way in a hurry, and there are signs that the rally may still have somewhat further to go. The main reason I remain somewhat bullish on the market, even after this week's historic run to the upside -- apparently the Dow Jones Industrial Average (DJIA) is going to score its second sharpest weekly point gain in history -- is the seasonal pattern, which is quite strong for the remainder of the year, and, on a short-term basis, remains positive into early next week. The last day of the month and the first few days of the new month are, of course, generally strong; so far, the end of November and first few days of December have not disappointed.

Historically, the month of December is a very positive month, and generally rated in the top two months of the year. At month's end the Santa Claus Rally pattern can occur, which is generally good for nearly a 1.5% gain over a seven-session period (the last five days of December and the first two sessions of January). So, it pays to remain invested during this time frame, but, it doesn't pay to buy after such a massive move to the upside. It just doesn't.

The Dow has now rebounded more than 900 points this week. As noted, that's apparently the second biggest weekly point gain in history. I don't know when the biggest weekly point gain was, but, I'd guess, that buying afterward was not the greatest idea.

Of course, going into the close of that abbreviated session last Friday, as the SPX dipped down to 1158.66, just pennies above its .618 retracement of the historic rally off the October 4 lows, now that was a time to buy. Targets were hit, all kinds of end-of-the-world talk was everywhere, the market was at oversold extremes on any metric. It was made to order. But now? Don't think so.

SPX - The .618 level was the ideal level to buy
Source: optionsXpress

The easy money has been made, and I have been selling into this move. Yes, I wish I hadn't sold so much earlier in the week as the market exploded to the upside. But, if you buy into the abyss, you have to sell on all the hope and hoopla. That's what I do. It's all I do. I'm still net long, but now only up to a maximum of 45% levels (including modest positions in junk bonds and short treasuries).

Giving me some justification for a little added caution for the near term is the pop back up to another big number. Recall that on the initial bounce off of the October lows, the market ran into some trouble at its .618 retracement of that decline from the May highs to the October lows. That level was 1257.58. There was also the unchanged level for the year, just a few pennies higher at 1257.64. Last time, I talked about that area as a stumbling block for the market, and on October 24, the SPX topped out about a point shy and promptly pulled back 35 points. Will it happen again? Beats me, but it pays to be on the lookout for these things -- these little stumbling blocks especially after such a sharp rebound.

SPX - Now returning to some resistance at another .618 level
Source: optionsXpress

As noted, though, in the bigger picture I remain constructive on the market and one big reason is the seasonal pattern. I have to like that. The chart of the S&P Futures now includes two, bullish island reversals from just this week. That's a big deal and it, too, is bullish.

S&P Futures - Leaving 2 big bullish island reversals below
Source: R.J. O'Brien

That's the good news, or most of it from where I sit, with the television turned to CNBC with the mute button pressed. The bad news is that the good news is likely mostly out and already factored into prices. The same folks who were in a tizzy last Friday over the coming collapse of the euro zone and the dark depression heading to the U.S. are now, once again, enamored with U.S. stocks. That's the bad news. Again, if the buying opportunity occurs in the midst of gloom and doom and panicky selling as we saw last week, how can it also be a buying opportunity when all the clouds lift as they apparently have? The answer is, it can't.

VIX - Not bullish at today's multi-month lows
Source: optionsXpress

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