One-Year Trading Range Charts for the S&P 500 and Its Ten Sectors

Below we provide our one-year trading range charts for the S&P 500 and its ten sectors.  In each chart, the blue shading represents the sector’s “normal” trading range, which is between one standard deviation above and below the 50-day moving average (the white line).  The red zone represents between one and two standard deviations above the 50-day, while the green zone represents between one and two standard deviations below the 50-day.  Moves into or above the red zone are considered overbought, while moves into or below the green zone are considered oversold.

While the S&P 500 has pulled back more than 8% since its intraday high on October 27th, it’s still trading within its “normal” trading range.  To get to oversold, the index needs to fall another 2.11%.  For bears that are hoping for farther declines, there is still quite a bit of downside room to run before an oversold bounce would be expected.

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The U.S. Thanksgiving holiday arrives this Thursday. Historically, equity markets on both sides of the border have moved higher during the day before and the day after Thanksgiving. Will it happen again this year?

Two of the strongest days of the year for U.S. equity markets are the day before and the day after U.S. Thanksgiving Day. Thackray’s 2012 Investor’s Guide notes that, “The day before Thanksgiving and the day after have had an average cumulative return by the S&P 500 Index of 0.8 percent per period”. During the past 61 periods, the Index gained in 50 periods, was unchanged in three periods and slipped in eight periods.

Performance of the TSX Composite Index during the U.S. Thanksgiving rally period also has been positive. The TSX Composite Index since its relaunch in March 2000 has advanced in nine of the past eleven periods.

Strength during the period is influenced by a difference in sentiment between institutional and individual investors. Most institutional investors and market makers have a diminished impact on equity markets because they close their books at midday on Wednesday, the day before Thanksgiving. They take an extended long weekend including a holiday on Friday, the day after Thanksgiving. Individual investors have a greater impact on equity markets. They are in a buoyant pre-Christmas mood. Thanksgiving Day in the U.S. is the start of the Christmas shopping season. The day after Thanksgiving Day is known as “Black Friday” and traditionally has been the busiest shopping day of the Christmas season. It became known as “Black Friday” because historically that is the date when retailers finally turn a profit for the year. Their profit and loss statement literally turns from red to black.

Prospects for a Thanksgiving rally in U.S. and Canadian equity markets from Wednesday to Friday this week are better than average. October retail sales in the U.S. reported last week were higher than consensus implying that consumers are returning to the stores for the Christmas season. In addition, retail merchandisers such as Target Stores and Wal-Mart offered positive guidance for the fourth quarter after releasing third quarter results last week. Consumer electronic goods are a particularly hot item this year. In order to prepare for the annual crush on Black Friday, at least some stores have decided to open on Thanksgiving Day for the first time. Others have decided to open at 12:01 AM on Friday.

On the charts, the retail merchandising sector has a positive technical profile reflecting an encouraging fourth quarter outlook. Investors interested in the sector tend to focus on two actively traded Exchange Traded Funds, Retail HOLDRs (RTH $109.78) and S&P Retail Index SPDRs (XRT $51.34). Retail HOLDRs touched an all-time high early last week despite a significant decline by equity markets around the world. According to Thackray’s 2012 Investor’s Guide, seasonal influences for the retail merchandising sector are particularly strong from October 28^th to November 29^th. Average gain per period during the past 21 periods was 6.2 percent. The trade has been profitable in 19 of the past 21 periods.

Retail HOLDRs holds 18 retail merchandiser stocks. Largest holdings and their portfolio weights are Wal-Mart (18.3 percent), Home Depot (13.6 percent), Amazon.com (13.4 percent) and Target (7.6 percent). Management expense ratio is zero.

S&P Retail Index SPDRs holds a more diversified portfolio with 96 retail merchandiser stocks listed on U.S. exchanges. Largest holding is Aeropostale with a 1.6 percent weight. Management expense ratio is 0.35 percent.

Preferred investment strategy is to defer the sale of equities, Exchange Traded Funds and mutual funds until after the U.S. Thanksgiving rally period.

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds available atwww.timingthemarket.ca He also is a research analyst for Horizons Seasonal Rotation ETF (HAC). All of the views expressed herein are his personal views although they may be reflected in positions or transactions

in various client portfolios managed by Horizons Investment.

My review of the markets is weighed heavily by the belief that liquidity should become less and less as we moved through December. Here in the U.S., this is really a three-day trading week as Friday’s half-day is usually on very light volume.

Yours truly shall be taking a vacation from December 10th to January 3rd.

U.S. Stock Market – The “Don’t Worry, Be Happy” crowd on Wall Street would very much like to get their greatest fable into full gear – the Santa Claus rally. Unfortunately, a few silly matters they would like us to consider unimportant, like the financial crisis in Europe and the coming debt disaster here in the U.S., has caused a flight delay of Santa’s ride over Wall & Broad.

But with “Gobble, Gobble” day near, I suspect the “happy” people and their favorite landing place for Santa’s reindeers, CNBC-TV, shall help accomplish their yearly feat (albeit somewhat subdued) starting today.

The 50-Day M.A. is holding (for now). And while the “happy days are here again” sentiment has yet to be fully worked-off, we’re oversold very near-term. I suspect we shall see a “turkeys can fly” (but don’t ask Les Nessman) attitude for the balance of the week.

Gold and Silver – Some unanticipated near-term technical damage has been done. And while the decreasing liquidity through years-end can exaggerate any moves, the longer term picture remains as bright as ever.

U.S. Dollar – You would think with the Euro apparently disintegrating and the only real money (gold) under pressure, good old Uncle Sam could manage to at least get above it’s fairly tight trading range. Again, while lack of liquidity can lead to such a feat, I would look to short the terminally-ill dollar if it got much above 81-82 on the U.S. Dollar Index.

U.S. Bonds – Death, taxes and actual losses over the next ten years to anyone who purchases a 10-year Treasury bond today are sure things in my book.

Oil and Natural Gas – Oil did briefly get above my target of $100. 2012 could see an historic military fight in the Middle East. $100 oil could be cheap if such an event occurs. Stay tuned.

Natural gas is building a very long base in its infant bull market stage. Unfortunately, most natural gas stocks are overpriced in my eyes.

Mining and Exploration Shares – Look for continuing tax-loss selling right up to the last days of December. I’ve an increasingly long list of attractive companies I hope Santa can bring me for Christmas. I shall make it known in the coming days.