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Year-End Rally On Track As Anticipated

In the previous post, I told you that the technical indicators I follow were pointing toward a rally after Thanksgiving. We are solidly in the middle of that rally, and we should see higher highs in equities by year-end.

That said, we are due for a small pullback to consolidate the post-Thanksgiving gains before we move into year-end. My best assessment is that once the rate cut news is announced either that day or more likely the next day or two, we will see some selling and profit taking.

The technicals I am talking about is the Overbought/Oversold Oscillator compared to the S&P 500 Index. It is currently showing an overbought (momentum) reading, which means that from a technical standpoint we are due for pullback. However, when its plotted against the S&P 500, whose relative strength shows that we should push higher, you draw the conclusion that the pullback will be a good entry point for all the cash that is still on the sideline waiting to invest. A lot of people sold out during the November correction and didn’t reinvest before the rally. Those people (the professional money managers) will want to show equities on their portfolio reports for 12/31, so they will want to buy into year-end.

The first week of January will be next assessment point. By then, if we are seeing a higher high on the oscillator along with a higher high on the S&P 500 Index (higher than the high before the coming profit taking – not necessarily a new “high” for the index, if you follow), the rally should continue for a few weeks more. If the oscillator is showing a lower high with the index showing a higher high, then momentum is waining and the rally is about to end.

We have our stop limit orders in and our GTC sales ready for non-core holdings. Some of those may hit as we move through the month, which is what we want to see. It is a planned methodology for protecting gains and taking profits in stocks we hold as diversifiers for our stocks in our core areas. It also gives us cash to put to work in our core areas if they sell off in any profit taking in the market.

You can read more about our core areas in previous posts, but just to summarize: Ag, Energy, Metals, Gold, Biotech, and companies with an above average percentage of their earnings coming from non-dollar denominated sales.