As late as Halloween, it appeared that 2007 had the potential to be a pretty good year for the stock market. The Nasdaq was up about 17%, the Dow was up 12% and the S&P 500 was still holding a 9% gain. With a week until Christmas, the picture was markedly different with the S&P 500 barely clinging to a 2% gain. The Nasdaq was leading with a 7% gain and the Dow was up just 6% for the year.

Barring some unforeseen rally the last week of the year, 2007 is going to go into the books as a very ho-hum year for investors.

There are plenty of reasons for the recent weakness in stocks. The sub-prime mortgage fiasco gets most of the press. But high energy costs and rising inflation are also to blame.

The chart below gives a good illustration of the condition of the equity market and it isn’t pretty. The black line is the daily closing price of the Nasdaq. The blue line is its 200-day moving average. It is currently below that line and showing a lot of weakness. The bottom portion of the chart is a moving average convergence divergence of the Nasdaq. Notice that after it bottomed and started moving up nicely in December, the past few days it turned downward again–not a good sign. Finally, the gold line is the S&P 500, included just for comparison purposes. Notice that it is showing even more weakness and is in danger of moving into negative territory before the end of the year.

A few weeks ago I explained my reasons for believing that we would have a rally in December that would carry stocks to their highest levels of the year. Obviously that seems very unlikely now. Probably the best we can hope for is that stocks will rally back to their highs reached earlier this month.

There is a lot of nervousness by investors and Wall Street traders right now. On a long-term basis the market remains in an uptrend, but the next three or four weeks will go a long ways to determining whether that will continue. Keep a close watch through the holiday season and be prepared to sell long positions if we see consecutive sharp down sessions.

Have a great Christmas Holiday with friends and loved ones.
F.S.