As we have been anticipating, some of the late October weakness was probably tied to end of fiscal year selling by mutual funds. The market ran up sharply since the September lows, giving funds an opportunity to sell some of their losing positions at better prices.
Fortunately for the market, the major indexes held near recent lows so no technical damage occured on a price basis and volume statistics, while not great, did not deteriorate to the point where a major correction would probably take shape.
The market has probably entered into a period of sideways action, and this is certainly not unexpected or disappointing. The market moved to an overbought condition and was in need of a breather. The major indexes ran up to resistance created by the heavy buying done after the March/April lows, the first real bit of supply since the rally began. Also, major components of the S&P 500 and the Nasdaq advanced to resistance levels from either the March/April lows or the sideways consolidation from the Summer.
If the market continues this trendless action, it would be positive for volume to be less than average, prior to any attempt to break out of the recent trading range. The near-term range (support and resistance) for the S&P 500 is 1053 to 1111 and for the Nasdaq, 1628 to 1793. A further pullback is certainly possible but we continue to believe it will be contained to a 50% retracement of the recent advance or 1028 on the "500" and 1590 on the Nasdaq.
The rough action earlier in the week created a day where both the NYSE and the Nasdaq saw heavy selling or distribution. The down/up volume ratio on each index rose to a fairly hefty 5:1, but as we said, this may have been related to tax loss selling by mutual funds. However, in strong market environments after a major low is in place, this kind of selling usually does not occur. In fact, this was the second day (since the rally got in high gear) for the Nasdaq where the volume breadth was so lopsided.
The positive is that the market turned higher when it had to and the 10-day down/up volume never exceeded 2:1 on either index. A reading that high would have negated the earlier bullish up/down volume signals and suggested a full retest would most likely occur.
Seasonals are certainly very positive as we move into the new year. The best three months of the year are November through January and the best part of the year is from November to April. Because individuals are able to do tax loss selling up until the end of the year, there may be some pressure on smaller issues that are way off their highs.
While short-term market action is probably limited on both the upside and the downside, the intermediate-term continues to look fairly bright. If ever the market had a wall of worry to climb, it is now. Arbeter is chief technical analyst for Standard & Poor's