With last weeks rally the S&P500 has crept back into the black for 2011. After being down as much as 14% in early October, SPX spent the ladder half of the year rallying some 17% to its close of 1,265 last Friday (it ended 2010 at 1,258). The breakeven range for SPX has proved significant on multiple occasions throughout 2011.
In March and June this range provided support as the market was pulling back from highs. However, once SPX broke below the breakeven range the bears seemed to grab the reigns. Bounce attempts back up to this range proved to be shorting opportunities as the market failed to sustain moves above it. The question now is whether or not this range will again act as resistance, or signal a breakout which propels SPX back towards 1,300?
In our view, price action was very positive last week but volume was not convincing. This is to be expected as trading volume is always very light the last couple weeks of the year. Then you have all of this “Santa Claus” rally talk and the whole thing becomes self-fulfilling in a way. You have everyone thinking a rally is going to happen so they position accordingly, thus, a rally happens. To us this explains last weeks rally more than any developments out of Europe or domestic economic data does.
Unfortunately volume will likely remain on the light side this week as well, so it will be hard to draw much from the price action, good or bad. With that said we can still keep our eyes on the themes that “dominated” the price action for much of 2011. Those themes being the performance of U.S. banks, yields on European nations, the performance of the dollar and the euro, and the trend in commodities. While the volume will be light across the board, the action in these “underlying themes” could provide valuable clues going into 2012.
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