Overall Market Trending Higher, but Be Careful

Overall Market Trending HigherThere are only a few weeks left in the year, and so far, based on what we’re seeing, there’s a decent chance we could see a Santa Claus rally, especially if a resolution is achieved in the fiscal cliff issue. Moreover, with the U.S. economic recovery on course, there’s hope of additional monetary stimulus by the Federal Reserve via bond buying.

The major chart development on Tuesday was the movement of the NASDAQ back to above its 50- and 200-day moving averages (MAs) and its turning positive in December, based on my technical analysis. While technology stocks underperformed in September and October, the NASDAQ is leading the charge in 2012, up over 16.0%. December has been mixed for technology. (Read what I said a year ago for technology; see “Technology Stocks: Invest in Them or Run for the Hills?”)

Blue chips are in favor at this moment, given the uncertainties, as the Dow is up nearly two percent this month. Small-cap stocks are also strong, with the Russell 2000 up 1.6%.

NASDAQ Composite Chart
NASDAQ Composite Chart

Chart courtesy of www.StockCharts.com

The charts are showing promise and potentially more gains to come.

With the recent upswing, the Dow, S&P 500, and Russell 2000 have turned positive since the end of the first quarter. The NASDAQ, Dow, S&P 500, and Russell 2000 are all showing a bullish golden cross on their charts with the 50-day MA above the 200-day MA.

The overall U.S. stock market is trending higher. About 57.2% of U.S. stocks are above their respective 200-day MAs, versus 45.7% a month earlier. On a short-term basis, 57.4% of U.S. stocks are above their respective 50-day MAs, versus 30.5% a month earlier.

Since breaking 1,400, the S&P 500 has been strong.

Take a look at the upward move of the S&P 500 stocks to above the 200-day MA, which is over 72.0% as of Wednesday, versus the 47.0% level in mid-November.

S&P 500 Percent of Stocks Chart
S&P 500 Percent of Stocks Chart

Chart courtesy of www.StockCharts.com

On the plus side, based on the seasonal trends, the period from November to April has historically resulted in the biggest gains for the Dow and the S&P 500, according to the Stock Trader’s Almanac. The S&P 500 has its target set at 1,500 in 2013.

Technology has been better, with stocks advancing over a period of eight months from November 2011 to June 2012.

So, while there is market risk and volatility, if you trade on historical patterns, ride the gains, but make sure you also take some money off the table.

Be careful, as there’s still major risk in the eurozone. The U.S. economy is improving, but there’s still a lot of work ahead with jobs growth and the unemployment rate.

I continue to recommend using put options or buying short-based exchange-traded funds (ETFs) as an offset to the weakness; it’s easy and cost-effective as a hedge. Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index puts include the SPDR S&P 500 (NYSEArca/SPY), PowerShares QQQ (NASDAQ/QQQ), and iShares Russell 2000 Index (NYSEArca/IWM).