Wait a Week

In the last trading days of the year, we are bound to see some volatile action on very low volume. It's easy for hedge funds to swing the market around when volume is this low, and any last-minute portfolio restructuring affects the market.

With these factors in play, I don't give this week too much emphasis in my analysis, but I also don't totally discount the action. There may be hints at potential changes in sectors as we enter the new year.

The market lost some of its momentum as it entered this week, so it's a good possibility that we may close the year strong.

In any event, I wouldn't make any large bets at this point. The best thing to do may be to sit back and relax, because the environment could be completely different next week.

Let's take a look at the current situation, starting with the broadest market index and working down to indices that give more specific sector views.

The market-representative S&P 500 has continued to hold above the 50-day moving average for five months and has had nothing but minor corrections since the uptrend began. Investors don't have anything to worry about until the 50-day level is breached. That's a good sign for the market at large.

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The Dow Jones Industrial Average has been able to chug higher since the beginning of August. Volume has dried up lately, but that's normal for this time of year. Institutions have been buying the boring large-cap, dividend-paying stocks for most of 2006; there's no major sign that they're abandoning that strategy at this point. But a break below the 12,200 area would be the first warning signal that this trend toward the big, industrial powerhouses of our economy is changing.

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Followers of Dow Theory know it's important for the Dow Jones Transportation Average to confirm the move in the DJIA (on the belief that goods made by the industrials have to be moved to market). The Transports' divergence is clear here; this group is in its own little bear market. The break through the 200-day moving average on high volume signals the Transports' major trend has changed for the worse. A test of the September lows is not out of the question.

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The tech-heavy Nasdaq certainly is hanging off the edge of a cliff: It's sitting right at support and the 50-day moving average. A break below this level would put an end to the uptrend that began back in August. If the Nasdaq can regain its momentum and break above resistance at 2470, it may be a signal that it's going to give us a new leg up.

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The Dow Jones Utility Average has also been very strong and has stair-stepped higher. Wednesday it held support at the 455 level. A break above 463 would confirm that the intermediate-term uptrend is still intact.

The new year certainly will bring new challenges as institutional managers align their portfolios to profit from the trends they expect to outperform the market in the coming year. Paying close attention to the movement in major market sectors will give investors a head start in profiting from these changes.

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Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.