Toughening You Up

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Shrinking volume over the final nine trading sessions that remain in 2011 (on Monday, December 26th, the market will be closed to observe Christmas from over the weekend) should come as no surprise to many of you. Seeing as many market players with sizable buying power are already closing up shop and away from their desks, it is going to be tough to assign too much significance to anything that happens in the stock market from now until the first few weeks of 2012. If you have largely kept your capital intact during this basically trendless year of 2011, you will find yourself toughened up and better for it. The market can make all of us look like fools at one point or another, which is why being right or nailing the big, bold call is not what separates the traders with staying power to profit over the long run from those who quickly burn out their emotions and portfolios. Instead, nimbly making adjustments, versus the trader more focused on his or her ego or stubbornness, is what makes the winner.

Looking through my screens this weekend, the best-looking areas of the market are the traditionally boring/unsexy and/or laughingstock sectors such as REIT’s, airlines, a few Dow components, pipelines, and utilities. The “sexy,” risk appetite areas of the market, such the high growth leaders since 2009 and precious metals miners, are still way too loose, sloppy, and vulnerable for me to find a quality long setup there. The financials may finally have a chance here, but my inclination is to still let the institutions do the heavy bidding for me first, before I move in aggressively for swing trades.

Perhaps one area of the market that accurately represents where we currently are is the weekly chart of the XLE, ETF foe energy stocks. I had highlighted the $62/$63 multi-year level as a key reference point at various times over the past few months. Despite the sharp move lower earlier in the fall, the breakdown below that level turned out to be a marginal breach which led to a sharp reversal higher. However, the bulls have failed to follow-through on that move to confirm it, thus far, as we muddle along in search of a clear direction.

Hence, we are stuck purgatory for now, straddling the line between bull and bear, with smart money on both sides of the trade.

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