Seasonal weakness ahead?

Mid-week market update: Jeffrey Hirsch of Almanac Trader recently indicated that the first part of December sees a period of seasonal weakness, followed by small cap leadership into year-end.

I regard seasonality as informing me about the climate, while the weather can vary day-to-day. Here is my assessment of the weather ahead.

Here is the case for some minor weakness. Urban Carmel pointed out that the market is overdue for a 3% pullback, especially when the put/call ratio is exhibiting signs of complacency.

Breadth indicators, as measured by NYSE and NASDAQ net 52-week highs-lows, as well as the percentage of S&P 500 stocks above their 20 dma, are rolling over. While instances in the past year have been inexact market timing signals, they have tended to resolve in periods of consolidation or minor pullbacks.

The first crack in the technical condition of the market may have been NVIDIA, which breached a rising trend line in late November. The stock is now trying to rally to regain the trend line. The strength of this bellwether could be an important indicator of market strength.

I am keeping an open mind, but I am not optimistic. The Semiconductor Index, which includes NVDIA, is exhibiting a series of lower lows and lower highs, both on an absolute basis and relative to the S&P 500.

I am also watching to see if smaller stocks can lead the way. On one hand, the Russell 2000 is exhibiting a minor relative uptrend against the S&P 500 (bottom panel). On the other hand, the equal-weighted S&P 500 has been flat against the S&P 500 since early August.

Another question to consider is the 14-day RSI of the S&P 500 reached an overbought condition. This has either been signals of an imminent pullback, or the start of a “good overbought” advance. How will conditions resolve themselves?

Subscribers received an alert yesterday that my inner trader had exited his long position in the S&P 500 and stepped to the sidelines. Risk and reward is becoming more balanced. It’s time to watch and wait.