End-of-Year Matters Complicate Waning Rally

 | Dec 22, 2016 | 1:29 PM EST
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The indices bounced off the intraday lows but the trading is increasingly tedious. Volume is slowing as traders leaving for the holidays and there is a dearth of leadership. The sector rotations that have driven the post-election rally are fizzling out as profit-taking and consolidation pick up.

This is exactly the sort of action that is needed after a big run, but the fact that the year is winding down complicates matters. At this time of year, trading decisions are often driven by outside matters such as taxes and portfolio positioning, rather than fundamentals and technical considerations.

I have a "sell" bias myself today, primarily due to a desire not to give back any recent gains. I'd rather err on the side of taking profits and raising cash than trying to anticipate further upside momentum. I do think the Dow 20,000 level is going to fall before the end of the year, but I believe we will need more corrective action before we see another good uptrend develop.

I am encouraged by the stock-picking action but it is narrower and the number of new 12-month highs is declining. There are a few, such as Health Innovations (HIIQ) , Micron (MU) and GasLog (GLOG) , but with thinner volume the risks are higher.

Technically, the next week is the time when a Santa Claus rally is supposed to occur, but I expect a higher level of volatility. While chances are high the Dow takes out the 20,000 level, there is also a good chance we will see an ugly day as well. There may be some holiday spirit in the air, but that doesn't mean trading is going to be easy.

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