Look For Profit Taking Into Year End – A Close Below SPY 112 Today Would Spark Selling!

This morning, the market is taking a small breather after seven consecutive gains. The breakout to new highs for 2009 was miniscule and profit takers are nearby. We have been in a news vacuum and traders don't have much to go on. Normally, Chicago PMI would be lost in the shuffle and this week it is in the spotlight. The number came out much better than expected, but it did not have much of a market impact. Tomorrow, initial claims will drive the early action on the last trading day of the year. Last week's number came in below expectations. I don't believe employers will lay people off during the holidays and the number should be decent. As I mentioned yesterday, the last trading day of the year has been weak recently. The NASDAQ has been down nine consecutive years and the DOW has been down four straight years. I believe profit-taking will set in. We have made a nice run this year and Asset Managers want to reduce risk. Higher capital gains taxes in 2010 could also spark selling. If the market falls below SPY 112, bullish speculators who try to play the "Santa Claus Rally" will get washed out. In light volume, we could see a very swift decline. I am not expecting a major pullback yet. Decliners currently outnumber advancers by 2:1 and the market feels like it could test the downside later today. Global markets were weak and we have the right backdrop. Look for stocks that are weak today and have jumped higher recently. Many laggards that have poor earnings have run up and they are particularly vulnerable. Steel producers are one example. I am buying in the money puts on very liquid stocks for a VERY short-term trade. I want to make sure that the bid/ask on these options is tight to minimize my slippage and I also want to make sure the Delta is high so that I am essentially short the stock. I will lock in most of my profits tomorrow since I don't want to carry positions over a holiday weekend. Be prudent and keep your size small.

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