A Pretty Typical Market

The S&P 500 set a new high on Wednesday, but it could not close at a new high.

The NASDAQ Composite could neither set nor close at a new high.

The Russell 2000, the index of smaller cap stocks, has returned to resistance from two previous trips to the 1210 to 1213 range. The chart of the Russell shows nothing suggesting it has the strength to propel above that level this time.

The track records of the major indexes show little net movement over the next 4 weeks, leading into the late-January earnings season. The Russell 2000 for example has averaged a slight gain over the next 4 weeks, but with gains in less than half of the years.

While it is hard to believe the major indexes are just going to continue to set new highs in the new year, I'll point out that the long-term average P/E ratio for the S&P 500 is around 16. The S&P 500 is currently trading at a P/E ratio of slightly more than 18, and if 2015 earnings estimates are used, the Forward P/E of the S&P 500 is at 16. So we have, in essence, a pretty typical market.

News events can always be the source of sudden and significant moves. Aside from that, there is no track record of significant institutional participation in the near future.

Watch existing positions closely. This is also a good time to review the past year's trade results. There are always lessons to be learned and refinements in trading strategies to be re-emphasized.

The seasonal patterns of many top stocks do suggest some interesting trade possibilities coming in the near future. I'll begin to cover those in Monday's newsletter.

Footnotes for trade setups:

  1. For tracking purposes, I buy or simulate buying as many shares as 1/15th of a $100,000 account ($6,667) will allow for. For a half-sized trade, I buy half that ($3,333).
  2. It would not be prudent to consider this, or any other trade, if the markets or the underlying stock opened on a strong move in either direction. You should re-evaluate the potential risks and return of any trade using actual prices and market environment at the time of trade placement.
  3. Alternative trades using long calls or puts in general should be bought or sold at the same time as a position in the underlying stock would be entered or exited. Since options involve additional considerations, such as time value decay, there are times it may be prudent to close the alternative trade before the underlying stock position would be exited.
  4. If the overall market and the stock under consideration do not open on the expected positive or negative note, the trade can be entered within the next few trading sessions if there is no significant adverse market or stock movement.

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

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