Bullish Holiday Season Followed by January Correction?

The market continued the surge higher today although most of the gains were given up as short-term overbought conditions proved too much for the bulls to overcome. The RSI readings are still quite high and a there area few other short-term indicators that are leaning towards the bearish camp. Remember, when I say short-term I mean 1-5 days.

As we move into post-options expiration I would expect to see some weakness on Monday as the day following options expiration is historically weak. After this short-term phenomenon passes the seasonal winds are overwhelmingly bullish and should lift the market higher going into the New Year. However, once the New Year passes I expect to see a decent sell-off. January corrections have been the norm over the last 20 years with 17 out of 20 years suffering sharp declines.

We could see continued upside momentum, forming a short-term peak, during the first few weeks of 2007, but this should taper off quickly as we reach the middle of the January. Typically, a correction has followed and usually sharp and quick, however, given the nice rally we have experienced since the Summer months the sell-off could last a bit longer. The odds are certainly leaning towards this scenario.

RSI Wilder (5) for December 15, 2006

• SPY – 61.1 (neutral)
• DIA – 75.6 (overbought)
• IWM – 56.7 (neutral)
• QQQQ – 66.2 (neutral)

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Kindest regards,

Andrew Crowder

Chief Options Strategist

Crowder Investment Research, LLC