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A Year-End Rally In Stocks Starts Now

By Jeff Clark
Tuesday, November 29, 2011

The Dow Jones Industrial Average exploded 300 points higher yesterday. It was one of the biggest one-day gains of the year... And it recovered almost 70% of last week's losses.
 
Yawn... No one seems to care...
 
One analyst after another showed up on the financial TV networks and proclaimed, "It's just an oversold bounce. Stocks were due for a quick pop higher. And that's all it is."
 
Oh, but it is so much more than that...
 
Yesterday was the start of the "Santa Claus rally" – a year-end stock market bonanza that could pop the S&P 500 8% higher or more. Let me explain...
 
First off, the mere fact that everyone else seems to think yesterday's action was nothing more than an oversold bounce has the contrarian in me thinking otherwise. Consider this chart of the S&P 500 plotted along with its Bollinger Bands... 
 
 
Bollinger Bands help outline the most probable trading range for a stock or an index. Moves outside of the bands are rare and indicate extreme overbought or oversold conditions. It is these extreme conditions that set the stage for violent reverses in direction.
 
The blue arrows on the chart indicate the few times this year that the S&P 500 has traded below its lower Bollinger Band... and then rallied back up within the bands. Notice the action immediately following the arrows...
 
In every case, the S&P 500 rallied back toward its upper Bollinger Band. It wasn't always a straight shot higher, like the explosive 16% move in October. (The move in August, for example, was a choppy 8% rally.) But buying the S&P 500 on any of these "buy" signals would have generated large profits over the following four weeks.
 
We got another buy signal yesterday.
 
Everyone else seems to think it's just an oversold bounce. I think it's the beginning of a move back up toward the upper Bollinger Band. In other words, stocks could gain 8% or more between now and Christmas.
 
Here comes Santa Claus...
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

"Circumstances in the market are changing fast. Good traders need to change direction just as quickly," Jeff warns. "Now is the time to look for other clues to the market's future direction, starting with the dollar." Learn what recent action in the dollar is telling us – and what to expect in the coming weeks – here: Why I Turned From Bearish to Bullish in Just a Few Days.
 
If you're ready to profit off the short-term direction in stock prices Jeff predicts, pay attention to the market's newest timing indicator...

In The Daily Crux
Market Notes
Chinese Internet darling Sina sits at a new 52-week low... down more than 50% from its 2011 high.
 
U.S. dollar turns down after approaching its October high.
 
Ending a seven-day drop, the S&P 500 climbed as much as 3.2% yesterday.
 
Gold is up 19% for the year... despite drops this fall.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1192.55 +2.9% +0.3%
Oil (USO) 37.85 +1.9% +5.2%
Gold (GLD) 166.63 +2.0% +25.2%
Silver (SLV) 31.27 +3.5% +19.7%
U.S. Dollar 79.22 -0.5% -0.6%
Euro 1.33 +0.6% +0.5%
Volatility (^VIX) 32.13 -6.8% +44.6%
Gold Stocks (^HUI) 541.28 +2.4% +0.3%
10-Year Yield 1.96 -0.5% -31.5%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 119.71 +2.9% +2.8%
S. Korea (EWY) 51.99 +5.0% -2.1%
S. Africa (EZA) 60.43 +6.0% -7.8%
Japan (EWJ) 9.09 +2.8% -10.1%
Canada (EWC) 25.74 +3.1% -10.9%
Singapore (EWS) 11.21 +3.3% -12.7%
Taiwan (EWT) 11.92 +3.6% -12.9%
Israel (ISL) 13.52 +4.6% -16.1%
Lat.America (ILF) 41.53 +4.0% -17.3%
China (FXI) 34.61 +3.8% -18.2%
Russia (TRF) 15.06 +3.9% -26.7%
India (IFN) 21.60 +4.5% -29.7%

Sector ETFs
Symbol Price
Change
52-Wk
Utilities (XLU) 33.85 +1.3% +14.4%
Big Pharma (PPH) 67.16 +2.7% +10.7%
Health Care (IYH) 67.01 +2.7% +7.4%
Retail (PMR) 20.60 +3.2% +7.2%
Consumer Svcs (IYC) 68.31 +2.7% +4.6%
Big Tech (QQQQ) 54.72 +3.5% +4.5%
Real Estate (IYR) 52.86 +2.4% +1.2%
Industrials (IYJ) 60.31 +3.2% +0.3%
Internet (HHH) 71.50 +3.9% -1.3%
Defense (PPA) 17.35 +3.3% -2.3%
Software (PSJ) 23.39 +4.1% -3.2%
Transportation (IYT) 83.85 +3.7% -3.6%
Insurance (PIC) 14.35 +2.7% -6.5%
Media (PBS) 12.26 +1.7% -6.7%
Telecom (IYZ) 20.06 +2.4% -6.9%
Oil Service (OIH) 117.26 +3.9% -7.1%
Construction (PKB) 10.89 +2.6% -7.2%
Biotech (PBE) 18.89 +4.5% -7.5%
Basic Mat (IYM) 62.85 +4.2% -9.2%
Water (PHO) 16.18 +4.3% -9.4%
Financials (IYF) 45.72 +2.9% -11.9%
Semis (PSI) 13.04 +2.4% -15.8%
Nanotech (PXN) 5.95 +2.8% -39.8%
Alt. Energy (PBW) 5.25 +4.4% -46.2%

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