Stocks at critical decision point

Despite historical tailwinds, equities hesitate as they near important technical price levels

By Anthony Mirhaydari Dec 8, 2009 7:21PM

MirhaydariAfter the rollercoaster ride that was the last two years, everything has suddenly gone quiet.

 

Trading volumes have plummeted. Price volatility has fallen to levels not seen since early 2007. The Dow Industrial Average has repeatedly knocked its head on the 10,500 level. The S&P 500 continues to trade near levels first reached in mid-October. And the Nasdaq is within a hair of the high reached in September.

 

This comes as a bit of a surprise to veteran market watchers since November and December are traditionally two of the busiest, best performing months of the year for stocks. Moreover, the first two weeks of December tend to perform twice as well as the last two weeks. Obviously, the financial markets have entered a period of indecision. But it won't last. Soon, Wall Street insiders will be forced to make up their minds.

 

SPX

 

The closely watched S&P 500 index being boxed in. As you can see in the chart above, there is resistance from the downtrend measured from the 2007 and 2008 reaction high (red line) as well as the 50% retracement of the 2007 high and March low. Support is being provided by the uptrend that contained the July low (blue). Neither the bulls nor the bears are willing to make a big move here -- which is why trading volumes have dried up.

 

The problem is the huge divergence in opinion among professional investment managers, strategists, and economists about where the economy -- and thus the stock market -- is headed. We are all looking at the same data, for the most part, but are drawing many different conclusions.

 

Much of the apprehension is being driven by a triad of worries: Concerns over a "double-dip" recession, concerns over interest rate hikes, and concerns over market valuation.

Without a trade to make, many are content to sit on the sidelines with sour faces.

 

Some of this nervousness can be seen in the way that traditionally "defensive" stocks -- those that are in non-cyclical industries and feature rich dividend payouts -- are outperforming traditional market leaders like technology and bank stocks. Since November 1, the Utilities SPDR (XLU) has gained 8.4% while the Financial SPDR (XLF) has jumped just 1.5%.

 

Eventually, someone will make a move and push the S&P 500 over the red line or down through the blue line. Right now stocks are like a coiled spring tensed with potential energy. Once it's unleashed, the resulting move will be explosive.

 

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

 

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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