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December 15, 2005

Load Bearing

Typically, I don't put much weight on support levels because it is hard to know ahead of time just how important they are to the collective. I do, however, observe them for clues to market psychology. A frequently proffered support level for the S&P500 is 1,270. This level was assailed twice today, and the bulls managed to hold it both times.

The first attempt was made in the first hour of trading, as the index dove from 1,275 to 1,268 in a 15-minute period. The SPX then popped quickly back above 1,270 and ground its way higher for the next 4 hours. I found it interesting that in the 4-hour rally… and I use the term "rally" loosely… the market only gained back half of what it lost in the 15-minute dive. The bulls were certainly laboring, and they exhausted with about two hours to go. Over the next hour another run at 1,270 was attempted, which was also repelled. From that point we drifted higher into the close, and the SPX, as well as the other major indices, finished the day more or less flat.

I recount today's action in such detail to make the point that an epic struggle is occurring in the markets. Opinions on what is in store for equities are as polarized as I've ever observed. Bulls will call today's action "consolidation" while bears will label it as an "inflection." The bulls have seasonality on their side, and may be able to elbow the markets higher in the coming low-volume holiday weeks. Bears point to a falling dollar, inflation, and weakening consumers.

It doesn't matter whom you believe because no one really knows. We can only look at as much data as possible to discover correlations that may increase our odds of interpreting the action correctly. For reasons outlined here many times, my opinion is that a sharp market decline is imminent. Whether the Santa Claus rally turns out to be real or just a fable that Wall Street wants us to accept, I believe that January will be a dark month for equities.

In today's news, Pier One Imports reported quarterly earnings which disappointed investors. They compounded their gloom by stating they now expect December same-store sales to decline from last year, and the shares got hit for nearly 15%. Following Best Buy and Wal-Mart, retailers are reporting, one-by-one, that this season is turning out to be less than jubilant, yet traders refuse to sell the sector. All news is being treated as company-specific. I'm tempted to just short a basket of retailers who haven't yet indicated how their season is going. Such a move might be slightly reckless, though, so I think I'll just sit tight and wait for more data.

Disclosure: Long BBY, WMT Puts


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