People are still arguing about will there be a Christmas rally. Of course they mean a broad base rally. Well my take is if there is a rally it probably will only be limited to a few stocks, but not the broad market.
The market generally takes only the combination of the following 2 sets of conditions. {no news, good news, bad news} and {trends up, trends down}. So you see there are mainly 6 scenarios. Over the last week or so I believe we were experiencing the combinations of bad news/trends down and no news/trends down.
Let me use a few ETFs to check how are we going from here. Let's start with SPY.
SPY was once about $155 back in mid-July, of course it crashed down to around $145 due to sub-prime news with extremely high volume. After that it went back up to as high as $157.52 by end of September, with volume back to normal. And then since end of September it started crashed back down again to currently $141. So, SPY did not make a higher high compared to mid-July, as well not with a significant volume. Currently the 100-week EMA (about $140) is a testing point (I don't want to say support level because it may not support it), and the 20-week EMA is the first resistance (currently about $149). If it cannot get support at the 100-week EMA, not good for the short term my friend.
QQQQ is a bit better, but given the broad market is not doing good, it's hard for QQQQ to go up by itself.
DIA has very similar experience like SPY in the second half of 2007, so I don't repeat in here.
IWM is even worse as it already dipped below the 100-week EMA. Testing the 200-week EMA here is quite possible (which is currently about $68.50).
FXI is fighting to stay above the 20-week EMA, but given the Chinese government wants to slow the stock market a bit, it's hard for FXI to go up much in the meantime.
EEM as well is fighting against 20-week EMA, it dipped below that by the end of today with quite an amount of volume, so testing the 50-week EMA of about $131 is possible.
XLF already dropped below the 200-week EMA, with many US banks keep making new lows, even if XLF is not going to go down by much from here, it doesn't seem to have any steam to go up much. In the near term it may try to break through the 200-week EMA of about $31.80. My guess is it will fail and stay below the 200-week EMA for a while, until there is obvious good news in this sector.
XHB is no better. Back from the beginning of June this year, XHB actually dropped faster than XLF. If you use a daily graph you'll see it started to drop below all 4 major daily EMAs. From then on, it never crossed back up above the 50-day EMA. Over the last 6 months or so it dropped about 50%. This drop is pretty significant as we are talking about a sector here, not one individual stock. I don't think it will keep dropping in this kind of speed, but it will need quite a long time to confirm the bottom.
XLU, on the other hand, is near its yearly high. Well this is understandable as when market gets weak, people go to sectors that are defensive, and utilities is one of those.
Finally GLD. It took off nicely from about $65 back in August to recently above $80. People always think gold is a good hedge of inflation. I personally don't think it is that simple. As the gold itself does not produce more value for you, so to fight inflation I believe the better way is to bet on good companies and keep switching to good companies. Or on the other hand target on good and stable companies that consistently increase their dividends.
What may rally from here to Christmas and the beginning of 2008? Well I cannot tell. I can only say, in the meantime, most stocks would go down more often than go up. Therefore, the probability that you correctly pick a poor stock that will go down is higher than to correctly pick a good stock that will go up. So for now I'll stay with my strategy of, making use of different ETFs, specially the Ultra and Ultrashort ETFs but not individual stock.
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