Light Trading Sqeezes Out A New High For 2009 – Happy Holidays!

December 24, 2009

I will not be publishing a new Daily Report today, only these market comments.

This week, seasonality has taken over and we are marching higher. A weak GDP number and horrendous new home sales were not enough to shake confidence. This morning, durable goods orders came in at .2% when a rise of .5% but was expected. The market took the number in stride and it focused on slightly better initial jobless claims.

The Santa Claus rally would officially begin today and over the last 40+ years it has had a 75% success ratio. On average, the last five trading days of the year and the first two trading days of the new year have produced a return of 1.4% on the Dow. This morning, the S&P 500 is up 6.5 points and we are challenging the highs for 2009.

In miniscule volume during a half-day of trading, no one will stand in the way of this rally. If we do break out, I would not give the move much credence. If the market continues to rally next week, it could squeeze some shorts out of the market. Most bears have been carried out in body bags this year and I don’t believe there are many shorts at this level. The option implied volatilities are at 18-month lows and the level of fear is very low.

Next week, the economic numbers are very light and they include consumer confidence, Chicago PMI, and initial claims. None of these are big market “drivers”.

I feel that we will see profit-taking ahead of capital gains tax increases in 2010 and I’m looking for weakness late next week.

I am short out of the money call spreads and I have plenty of breathing room. Resistance at this level has been strong and there are enough cracks in the dam (credit concerns in Europe, weaker economic numbers) to keep a lid on this rally. If the market does stage a major rally I will buy back my call spreads and sit on the sidelines. The higher we go from here, the more bearish I get. If this scenario unfolds, I will wait for the momentum to stall and I will buy puts.

It’s time to shift our focus from the market to our friends and family.
May you and your family be blessed this holiday season!
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