What I Am Watching Into Year-End

With just a few trading day left in 2012, volume is bound to drop off sharply later this week.  As such for many large institutions this means making any major moves in the market may become difficult at best.  For the retail investor and home-gamer it will also pay to be cognizant of the volume drop-off as it does translate into choppier tapes.  Afternoon sessions especially will be prone to fast moves (such as seen on Monday), when it doesn’t take much volume to move the market.

Given this drop off in volume and general news flow the last two weeks of the year, I have over the years made it a rule to not make any major investment calls during this time.  Furthermore, I dramatically cut back on trading and any trades I do make will only be half the usual size.

Also, considering that as a result of the smaller volume into year-end any market moves may not necessarily be taken as serious, I will mostly focus on whether the current market structure holds.  More specifically, what I will be looking for during each of the few trading sessions left in 2012 is whether key levels on the equity indices hold and how various sectors and other asset classes hold (correlation).

The über-important support level on the S&P 500 is the November reaction lows at 1443, followed by 1384  and 1400 (give or take a few points).  Since late November there have been three telling days for the bulls (See arrows on chart: November 28, December 5, December 17), which continue to speak for the positive market structure that in Q1 2013 should eventually lead to yet higher prices.

With the recent mean-reversion move in Apple Inc (AAPL), I will also be keeping one eye on its chart for given its still ultra-large market capitalization does matter to the major indices.  On the multi-year weekly chart my more meaningful level to watch is closer to $460

To the point of cross-asset correlation, up-trending tapes tend to show high correlation among at least the cyclical sectors.  I will be looking to see whether this correlation remains high.  See the below chart, which shows correlation of the S&P 500 sectors over the past week.  Note most things are moving up together, with exception of consumer staples and health care, which are defensive sectors and in a healthy tape they should lag the broader market.

In summary, during the remaining trading sessions of 2012 I will rather focus on the bigger picture and market structure than getting too hung up with the small stuff.  Given the lack of volume and news-flow there is simply no reason to do all that much.  It’s been a long year and I for one will focus hard on spending time with family and friends and resting-up, for the battle of 2013 will begin again all too soon.

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