With just a few trading days left in 2012, market volume is bound to drop off sharply later this week.
For many large institutions, this means making any major moves will become difficult at best. But retail investors also should be aware of the volume drop-off because it translates into choppier tapes. Afternoon sessions will be especially prone to fast moves (such as the one seen Monday), when it doesn’t take much volume to move the market.
Given this volume cliff and general news flow going into the last two weeks of the year, I’ve made it a rule not to make any major investment calls during this time. I also dramatically cut back on trading, and any trades I do make are about half the usual size.
As a result of the smaller volume, any market moves heading into year’s end might not be taken seriously, so I will be focusing on whether the current market structure holds. Specifically, during each of the remaining trading sessions, I will be looking to see whether key levels on the major stock indices hold, and how various sectors and other asset classes hold (correlation).
The über-important support level on the S&P 500 is the November reaction lows at 1,443, followed by 1,400 and 1,384 (give or take a few points). Since late November, there have been three telling days for the bulls (See arrows on chart: Nov. 28, Dec. 5 and Dec. 17), which continue to speak for the positive market structure that in Q1 2013 and should eventually lead to yet higher prices.
After the recent mean-reversion move in Apple (NASDAQ:AAPL), I also will be keeping one eye on the AAPL chart, as its still ultra-large market cap does matter to the major indices. On the multi-year weekly chart, my more meaningful level to watch is closer to $460.
To the point of cross-asset correlation, up-trending tapes tend to show high correlation among at least the cyclical sectors. I will be looking to see whether this correlation remains high.
See the below chart, which shows the correlation of the S&P 500 sectors over the past week. Note that most things are moving up together, with the exception of consumer staples (XLP) and health care (XLV) — they are defensive sectors, and in a healthy tape, they should lag the broader market.
Bottom line: During the remaining trading sessions of 2012, I will focus on the bigger picture and market structure rather than sweating the small stuff. There’s no reason to do all that much given the lack of volume and news flow.
It’s been a long year, and I, for one, will focus hard on spending time with family and friends … and resting up, as the battle of 2013 will begin all too soon.