My final of three videos with Jeff Macke of Yahoo! Finance’s Breakout was recently posted. In the first one we talked about retail and Black Friday , then the VIX and why it has stayed ‘low’, and in this one we do more of a broad market discussion.
You can watch the live interview below, but here’s a summary of our discussion.
- Where to from here? Right here we think we could follow the previous two years and see a pretty good year-end rally. We recently saw extreme levels of fear in the options market, consistent with previous major bottoms. Also the AAII recently had the most bears since the US debt downgrade in August ’11. This much fear can be very bullish from a contrarian point of view.
- Is there the potential for the type of gains we saw earlier this year when the market went virtually straight up for months? We think so. Taking a look at the shorts, there is still a lot of short interest out there which could propel more short covering and push the market much higher. In fact, this ratio is where it was last September and is also trending lower. In the past, this has been a bullish combo. Then looking at seasonality, after Black Friday till the end of the year the SPX has been higher 8 of the past 9 years. Specifically the past two years have seen some stellar gains, with over eight percent last year. The common factor with then and now is there was a lot of fear and it all adds up to the potential for higher prices into year-end.
- Should we chase it here? Or should we wait for a pullback? I’d still wait for pullback. But one more point I want to make is when the Dow breaks through its 200-day moving average in the November, this is actually bullish. Going back 100 years, this has happened 11 times and the results are very bullish. In fact, one month later the returns are about +4.5%. So when everyone gets all beared up and we break a technical trendline that gets a lot of exposure, that could be a contrarian buy signal.
Lastly, I was on CNBC last week as well. I talk at the end and unfortunately didn’t have a lot of time to talk (the problem with going last). But you can watch it here. I again note some of the negative overall sentiment we are seeing, coupled with the positive seasonality, and how it all should add up to a strong December.