For stocks, it's do-or-die time

A cute year-end rally has pushed stocks back over a critical level separating bull and bear markets. Can it last?

By Anthony Mirhaydari Dec 27, 2011 5:13PM

While many people are still enjoying extended holiday breaks or are busy cashing in those ubiquitous gift cards, Wall Street has been gently pushing stocks higher. And higher. And higher. Enough to push the S&P 500 back over its 200-day moving average, the line of demarcation between bull and bear phases, for the first time since October.


Catalysts for the move have been a relative calming of the eurozone debt crisis (though it's changing for the worse again with Italian borrowing costs surging back over 7%) and some better-than-expected economic data here at home. Plus, stocks just tend to do well during the final few weeks of the year. Chalk it up to holiday cheer.


The question is: Can the positive momentum last and keep stocks out of bear market territory?


Setting aside discussions of the economy -- which has largely been kept out of the ditch by consumers drawing down savings, an unsustainable trend -- from a technical market perspective, I don't think it can.


Breadth is narrowing substantially as the bulls focus on fewer and fewer stocks, and those stocks are defensive noncyclicals that tend to outperform in the final moments before the most harrowing turns of a new bear market.


Specifics: Take Tuesday's sideways crawl. Despite all the major averages spending the day in the green, there were only 97 net advancing issues on the NYSE as the closing bell loomed. That's down nearly 92% from Friday's finish and down from more than 2,300 net advancing issues on Dec. 20. That's a sign that higher prices aren't encouraging a buying frenzy. It's drawing out supply as sellers use higher prices to cut risky positions.


That's bear market behavior.


Moreover, investors who are buying are focusing on health care, utility, telecom and consumer staples while shunning industrials, technology, emerging markets and materials. This isn't the strategy you follow if you see brighter days ahead for the global economy; it's a strategy you follow if you are searching for dividends, stability and safety in an increasingly volatile and uncertain environment.


This is also bear market behavior.



The chart above shows that when the Consumer Staples SPDR ETF(XLP), which includes stocks like Wal-Mart(WMT) and Colgate-Palmolive(CL), outpaces the overall market, it tends to be a short-lived affair. You can see this in the chart above, which shows how the XLP marched to a new high in mid-2008 just weeks before Lehman Bros. failed, the financial crisis raged and stocks plunged.


If cyclical stocks can retake the reins and the S&P 500 can extend beyond the 200-day average on expanding breadth, then I'll eat my words and join the chorus of the optimists. But until then, I continue to recommend investors use this rebound as a last selling opportunity ahead of what's shaping up to be a dark and troubled new year.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.


The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


Dec 27, 2011 9:29PM
Just clicked on a news lead about spending money on pets and it comes to this website which has nothing to do with the topic.  Way to go MSN.   Are all your IT guys on Christmas vacation?

My New Years resolution would be to go open season on all of those market manipulators that still think of the economy and legitimate investors as one big money tree waiting to be plucked. Too bad for them they sucked off all the leaves, so all that's left are the branches and twigs. 


It would be cool if someone came up with a deck of cards like they did for the top Al Qaeda terrorists. Pick out 52 of the greediest CEOs, hedge fund managers, and  investment bankers that pawned all of those derivatives that contributed to the housing bubble, or otherwise committed acts of economic treason that put us where we are now.  We should treat these financial miscreants like terrorists, and track them down like the dogs they are.


Now let's be clear on this, there are plenty of respectable captains of industry out there who are making lasting contributions to the economic growth of our country. We need to continue supporting a positive business climate. Unfortunately, the bad guys by and large haven't been held accountable, and that's the real tragedy in all of this.


For every con that got caught illegally bilking billions from the markets, or who evaded taxes with clever stock option futures, or sheltered overseas accounts, there are probably 10 that are still laughing all of the way to the bank.


It's time for the SEC, FED, FBI, DOJ, IRS, and all their rowdy friends to make the outlaws pay up. The politicians won't do it, because they would be putting the hands that feed them behind bars, and then where would all of the campaign contributions come from? 


If government doesn't clean house, then it's up to the American people to seek justice. We need to restore the confidence and trust in our free market system before we're all living in caves again. Keep fighting America!

Dec 27, 2011 7:32PM
Oh great, another game of musical chairs! Would somebody please start the music! Hey wait there's no damn chair! OOPS!!!!!Crying
Dec 27, 2011 9:52PM
For those that say Anthony only write about the bull market, here is an example of a bear forecast. Don't get caught by the santa clause rally. After the first of the year we will probably go back to the puppetmaster marketmakers sending the market up 2-300 points one day, and down 2-300 points the next
Dec 28, 2011 12:05AM
How about Foxconn announcing they will begin to dump cheap solar panels on the American market today? Why are the Chinese rubbing Obama's face in solar dust? Report on that!
Dec 28, 2011 11:19AM
I agree with RIA, Tony is smoking hot lately! I would say the end of 2007 is more of a carbon copy to the end of 2011. The S&P peeked above the 200 dma and then it was lights out.
Dec 28, 2011 11:20AM
Personally I'm just hitting the snooze button till the market drops again to buy back in when things aren't over bought and over priced.

Dec 30, 2011 11:33AM
Most American companies are multinational and even though some barely break even in America, like Walmart, they make most of their profit overseas where people still have real spending power. America is a debtor nation of 14 to 20 trillion in debt and the Eurozone of barely $2 trillion in debt. Huge difference.



The Eurozone does not have 2 trillion in debt. Italy by *itself* has 2 trillion in Debt. EU debt is very similar to US.


Most "American Companies" make their money here. Be more specific. "American Companies" means you are including 22 million small businesses.


And secondly, even if you are talking Mega Multinationals, The biggest sources of overseas income have been (and still are) Europe and North America (Mexico and Canada, which is considered overseas income).


And if by *most* you mean about 50% on the S&P500 companies, that's pretty deceptive. Because the other 50% of earnings comes from the US. And spending power? It's not that. It's simple economics, less developed nations grow GDP faster over time.


Go read a book.

Dec 27, 2011 11:56PM

Most American companies are multinational and even though some barely break even in America, like Walmart, they make most of their profit overseas where people still have real spending power. America is a debtor nation of 14 to 20 trillion in debt and the Eurozone of barely $2 trillion in debt. Huge difference. 2013 to 2015 will be tough here because of very large cuts in federal government and military spending but eventually we will be solvent. While all of this recession has been going on here, my favorite company Disney has been buying companies and starting operations in foreign markets like Latin America, India and Russia. There is a global thirst for the American way of life and we will run out of oil before we run out of LOVE.

Dec 28, 2011 8:42AM
ok i clicked on this because it said "people who spend the most on pets"... am i missing something?? this is nothing but stocks Sick
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