November option expiration has come and gone and I've got good news and bad news. The good news is my commentary is going to be short tonight. The bad news is that you've only got 33 days left until Christmas. Just kidding. Actually the bad news is that nothing much has changed from the week before. Trading volume last week was extremely low. I guess that's a good thing considering we were down four days in a row. Lack of follow through on Monday's bullish breakout in the major indices was very disappointing.

Last weekend I said I was concerned by the growing number of failed rallies, bearish reversals and the ever popular bearish head-and-shoulders pattern. Unfortunately, the last five days of trading has only made the situation worse! The larger trend may still be up but momentum indicators are falling fast. Now traditionally the Thanksgiving shortened week tends to be a bullish one. This year could be different with the S&P 500 up 60% off its 2009 lows. If you thought last week's volume was low then this week's should be abysmally low.

I heard several comments about how fund managers are starting to play it safe by moving money into short-term treasuries. They may not be earning any interest but they're not at much risk either. Check out this chart of the yield on the short-term bonds. Ask yourself why fund managers would put their money into a note with a yield as close to 0.00% as you can get? Maybe this talk about money managers getting nervous is true.

Chart of the 13-week T-bill:

Overall I'm still very concerned by the under performance in the small cap names. Fund managers are definitely cautious and the small caps have produced a new lower high (see daily chart of the Russell 2000). You'll see a similar pattern (lower high) in the SOX semiconductor index. The group was clobbered on Thursday with a major downgrade but upward momentum had already stalled before the downgrade hit. Last week I mentioned how the financials had put in a new lower high. You'll also see a lower high in the oil service names as well as a few more sectors. The only groups that look bullish right now are drugs, retailers, and gold miners. Momentum in these last three groups is also starting to wane. The gold miners might be an exception but the price of gold looks very overbought and when it corrects the pull back in the miners could be painful.

On a short-term basis I'd keep my eye on the 1080 level for the S&P 500. If 1080 breaks down then we could be looking at a drop toward the November lows near 1030. Considering the bearish shadows growing across the market I would hesitate to launch new long-term LEAPS positions at this time. In the mean time, I wish everyone a wonderful Thanksgiving holiday!

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Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:

Chart of the Dow Jones Transportation Index:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown