Will Santa Come This Year?

12/22/2008 2:03 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, says some sectors may exert leadership for a Santa Claus rally heading into the new year.

The market ended higher last week, but it started off strong and ended weak. We were unable to take out key resistance points, as the market faded when they were challenged.

Does this put an end to the Santa Claus Rally? There is still some glimmer of hope. But even if we manage to move higher, I would not be surprised for the Santa Rally to end in a New Year’s hangover. There is still a major down trend in play, and the current bounce has not shown itself to be any more than just that—a bounce.

Small caps need to find some mojo for the week. They failed to break through resistance at 260 on the S&P SmallCap 600 Index, but the index is in a position to break higher short term. iShares S&P SmallCap 600 Index ETF (NYSEArca: IJR) is the ETF that corresponds to the index and is worth keeping an eye on to break through resistance at $43.60. This could clear the way for a move to the November high of $48.17.  

Health care was the clear leader last week, gaining 3.8%. Consumer discretionary was up 1.3%, while industrials gained 1.4%. Energy lost 4.7%, followed by basic materials, which fell 1.3% and utilities, which were off 1.1%. This was another consolidation week as we remain in an 11-week trading range.

The Standard & Poor’s 500 index is a good chart to review to see clearly the current resistance in play for the broad market. The 918 mark, along with the 50-day moving average (near current prices), have been the key resistance points over the last two weeks. Clearing these levels would open the way for a move to 1005, the November high.

Even with a breakout to that November high, we would remain in the current trading range, but that is still better than a 13% move from Friday’s close. The table below shows various sector ETFs and the breakout points that signal a move higher.  

The challenge from my perspective remains leadership. What is going to lead the market higher? The short-term plan is to track the leaders into the new year and look for a break through near-term resistance.

Infrastructure plays have perked up on the expected stimulus package President-elect Obama proposes after he takes office in January. This is currently leading materials, engineering and commodities higher in the short run, so last week’s pullback in these sectors is worth watching for entry points. Retail continues to defy the odds and is in a position to offer some leadership into the new year.

Chip stocks are attempting a rally, which is helping the technology sector. Despite downgrades and revisions, the PHLX Semiconductor Sector Index continues to show hope, at least in the short run. The Dow Jones US Insurance index made a nice move higher as well last week and is setting up to provide some needed leadership as well in the financials.

All of this could amount to a happy new year, but these are short term moves. Remember: The major trend remains bearish.

Have a happy holiday and remember those who can’t be home for the holidays as they defend our freedom!

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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