Stock Market

Stock Market
The market struggled during the end of the year (the supposed "Santa Claus rally") and became completely unglued in the first three trading sessions of the new year. The old adage is "When Santa Claus fails to call, bears will come to Broad and Wall." Statistically speaking, about 50% of the years in which the first week is negative (as it was this year) are down years. We will have one more early gauge -- the January barometer, which says how the market does in the first whole month of the year, will show how the whole year goes.

All of the major averages have broken down below their short- term, 20-day moving averages (which have now rolled over and begun to turn downward). Furthermore, they continue to make new lows, although the damage since those first three days of the new year has been much more muted.

Equity-only put-call ratios remain on their sell signals. The standard ratio didn't turn negative until January 5th, but the weighted ratio has been on a sell signal for some time. See Figures 2 and 3. They will not give buy signals until they roll over and begin to trend downward.

Market breadth deteriorated badly during the first week of this year. Breadth sell signals remain in force.

Finally, there is $VIX. It jumped higher before the market sold off -- a good "prediction" on its part. But then it began to decline again, despite the market's failure to rally. There has been much debate among option traders as to whether this recent decline in $VIX is a) predictive, indicating that the worst is over, or b) contrary, meaning that option traders are way too complacent and further declines will be necessary to shock them out of their complacency. Given that $VIX was recently a good predictor, we have to lean that way a little, but it certainly seems risky to be selling premium (i.e., betting on a $VIX decline) at these low levels.

In summary, since all of the indicators -- save $VIX -- are bearish, we retain a bearish opinion. Ideally, the market will decline enough to generate true buy signals (not merely the lukewarm buy signals that littered the first half of 2004).
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