Ahhhh, the week of Thanksgiving. Trading is light, economic announcements are few, and investors can take a break while their thoughts turn to giblet gravy and time with family and friends. Or so is typically the case. The bears came ready to play this week, and didn't want any holiday respite to detract from their business at hand. The bulls made a violent 11th-hour effort on Tuesday, but it was back into the red early Wednesday when rumors of an intra-meeting rate cut proved to be wildly exaggerated. The bulls came back swinging on Friday, with the market staging a steady rally throughout the shortened session. But by the week's close midday Friday, the major market indices had broken their 6-year winning streak for Thanksgiving week. The Dow Jones Industrial Average (DJIA) and the Nasdaq Composite (COMP) both lost roughly 1.5% for the week and the S&P 500 Index (SPX) tripped 1.2% lower.
As I mentioned in last week's column, I don't know whether we've seen the sort of dramatic moves necessary to form a short-term bottom from which a convincing rally can launch. Typically, one has to see more signs of outright despair before buying can begin again in earnest – it's always darkest before the dawn. Volume hasn't been as climactic as I would like to see (this may have something to do with the time of year), short-selling activity hasn't ramped up sharply, and activity in the CBOE Market Volatility Index (VIX) has been relatively subdued (more on that later).
But this past week, I did see some glimmers of hope that a bottom could be occurring sooner rather than later. In Tuesday's rocky trading, marked by a wide intraday swing and preoccupation with the "will-they-or-won't-they" Fed, volume on the S&P Depositary (SPY) receipts hit nearly 415 million shares. That's the closest the exchange-traded fund (ETF) has come to matching the volume seen at the August 16 nadir – when 547 million shares changed hands – and the fifth highest ever. While I'd prefer to see a spike that took out the August 16 record, one must consider that November 20 was just two days before the Thanksgiving holiday and Thanksgiving week volume tends to slow appreciably. In this context, Wednesday's seemingly light volume of 259 million becomes less than shabby.
Last week's pullback proved to be a perfect storm for the S&P 500 Index (SPX), as it also moved low enough to test its 80-week moving average. As you recall, this trendline marked a short-term bottom for the S&P (and for the market) in July 2006 and August 2007 as well as in 2005 and 2004. It has been an important bastion of support and I didn't expect to see a reprieve from the recent selling pressure without a visit to this trendline. Making this level even more significant this time around is that it also defines the threshold between positive and negative territory for 2007. Wednesday's intraday low in the S&P was 1,415.64. The index's 2006 close was 1,418.30.
And to add to this near perfect confluence of indicators, the drop in the S&P reached a precise 10% decline from its October 11 high to its November 21 low. The Nasdaq Composite also reached a 10% correction from its highs, while the Dow Jones has come in just shy of the 10% demarcation. The SPX's pullback to the important 80-week moving average, which is coincident with a 10% correction from the recent highs and marks a break-even level for 2007, puts the index at a critical juncture as we move into the final weeks of the trading year. This past week's low is certainly a level from which a year-end rally could begin to establish itself, and it has got to be encouraging that we rallied sharply off this level in Friday's abbreviated session.
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