The Post-October Rally May Be Stalling

Banks yes, folks, banks! rescued the stock market yesterday. In the early
going, it looked as if gloomy headlines out of Europe and a couple of downbeat
Christmas sales reports from U.S. retailers were going to throw cold water on
Wall Streets January festivities. But then came a rumor that President Obama may
be readying a blockbuster refi program for underwater homeowners. Presto, bank
stocks zoomed, dragging along most other sectors of the market for the ride. At
the closing bell, all the headline indexes except the Dow had swung into the
green. Only time will tell whether theres any substance to the refi rumor. (The
White House denied it this evening, but you never know what the president may be
discussing behind closed doors.) If a proposal of this sort eventually sees the
light of day, it could give the market an important psychological boost.
However, we cant just assume that President Obama is about to sprinkle magic
fairy dust and cure the housing depression. We have to go on the evidence we
have and on that basis, it appears the markets rally off the October lows is
growing long in the tooth. Without exception, my intermediate-term technical
indicators (those that foreshadow market trends two to six months out) testify
that the post-October advance is gradually losing strength. For example, the S&P
reached its maximum positive spread over its 50-day moving average on Oct. 27,
at 8.5%. At yesterdays close, the index stood only 3.3% above its 50-day average
price. So whatever else may be happening, the market isnt accelerating to the
upside. In fact, despite the bullish hoopla in recent days, the S&P still hasnt
closed above its Oct. 28 recovery peak of 1285. Even if the index touches a new
recovery high in the next few sessions, the breakout will have taken a long time
coming another technical yellow flag. All in all, Im more inclined to sell into
strength here than to do much new buying. For example, Im planning to sell SPDR
S&P MidCap 400 ETF (NYSE: MDY ) if MDY hits $165. But, if youve got fresh cash
to put to work, I suggest tucking it into short-term bond funds like: Weitz
Short-Intermediate Income Fund (MUTF: WEFIX ) Fidelity Short-Term Bond (MUTF:
FSHBX ) T. Rowe Price Short-Term Bond (MUTF: PRWBX ) Vanguard Short-Term
Investment Grade (MUTF: VFSTX ) Or for a higher yield (and somewhat greater
volatility), consider the iShares JPMorgan USD Emerging Market Bond Fund ETF
(NYSEARCA: EMB ) I referenced in Wednesdays post . What about hedging via
double-short ETFs like ProShares UltraShort S&P 500 Fund (NYSE: SDS )? It still
seems a little early for that.