Waiting (Politely) for a Rally

 | Dec 19, 2011 | 8:37 AM EST
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"After you, Alphonse. No, you first, my dear Gaston!" --From a century-old comic strip

After waiting all of last week for some sort of end-of-the-year rally, market players are forcing the issue this morning. There isn't any particular good news to justify buying, although all eyes are focused Europe again. The death of North Korean leader Kim Jong Il pressured Asian stocks overnight due to uncertainty about his son, who will likely be the new leader, but that doesn't seem to be having much impact.

There was talk that European banks may be able to use money from the European Central Bank to buy sovereign bonds, but there is also talk about the potential breakup of the European Union, which is keeping the mood mixed. There are ongoing meetings of EU finance ministers, so there is the potential for news at any time.

At the end of the year, trading typically slows down like it did last week, but we generally still have pockets of upbeat speculative action even if we don't have much movement in the indices. So far, the overall mood of this market has been extremely gloomy and there has been no aggressive momentum trading at all. The lack of any leadership or movement in individual stocks is quite surprising. All that continues to matter is the macro news flow, and that is certainty not upbeat.

My thesis for end-of-year strength was that the news flow out of Europe was likely to slow as holiday vacations kicked in and that would allow us to focus more on individual stocks.  Last week, there was a bit less attention paid to Europe, but that didn't seem to help the mood at all.  Instead of speculative action in individual names picking up, we just had a higher level of disinterest and drifted down all week.

There are still nine trading days left in 2011, and there is a good likelihood that the bulls will manage some sort of bounce soon. We are technically oversold, the mood has been dour, and won't take much to suck in some buyers. The problem is that the sparks aren't catching fire and the strength is being sold quickly. Understandably, trust levels are very low and there isn't much of an appetite to chase stocks right now.

Like the comic strip "Alphonse and Gaston" made popular by Frederick Burr Opper at the turn of the 20th century, what we have is a situation where all the buyers are waiting for someone else to make the first move. They are happy to buy but they want to make sure that there are other buyers out there willing to make a move. Once there is some confidence that the buyers are ready, willing and able to act, that will draw in more buyers.

This sort of setup has the potential to produce a good-sized move if sentiment finally shifts from worrying about being caught in a downtrend to concern about being left out of a rally, but it needs to be kick-started and we need to hold up long enough for buyers to become anxious about missing a Santa Claus rally.

We have a good test of the mood this morning. Monday morning gap-up opens generally invite profit taking, but if we can hold the early lows and draw in some buyers, we may finally have a chance to bounce a bit. The key here is not to fizzle out quickly, like we did every day last week.

It is going to be slow and choppy but market players have the potential to make a Santa Claus rally self-fulfilling. Keep a close watch on the action and be ready to move.

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