Last week I wrote about the internal or momentum low being put in on Wednesday. Thursday’s action was essentially a stand off between the bulls and bears although the bulls had to be pleased that stocks stopped going down. Friday was the big point gainer for the bulls, but there wasn’t much upside after the big gap opening.
Assuming I remain correct in my assessment of the bottom, stocks usually see a day or two of red before exceeding Friday’s high this week. From there, we are supposed to see more upside lasting at least a few weeks or more into a trading peak in February before another decline sets in. The beginnings of these rallies are littered with the most beaten down names running the hardest as short covering initially causes the move. Real leadership takes some time to develop so don’t prematurely hop on the former losers as new leaders.
Stocks are going to stay volatile for another 4-6 weeks. Buying weakness and selling strength is the strategy I most want to follow until the markets settle down. Stay nimble and don’t be stubborn. I am not loving the action in the financials, industrials and materials, while healthcare, biotech, staples and REITs behave better. The next few weeks are also going to be an important period for high yield (junk) bonds to make a stand. I continue to believe that this key canary in the coal mine sees a major bottom in 2016.
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