With stocks continuing to deliver gains week after week, the question is: Which ones should be the strongest over the short term? According to the charts, tech stocks might have an edge.

Economic News Keeps Fed on Hold
SPDR S&P 500 (NYSE: SPY) gained 0.61% last week, closing higher for the fifth week in a row. The gain was due to a 1.35% rally on Friday that reversed losses for the week.#-ad_banner-#

SPY has now closed higher in 16 of the past 22 days (73%) since bottoming in early October. This is an unusually strong market. Over the past 1,000 trading days, there has been an average of 12 up closes over 22 days (54.5%). Strength in the stock market is often followed by more strength, and I expect to see more gains in the stock market in the next few weeks.

Friday’s gains could show that traders are getting comfortable with economic growth. GDP could grow as it did in the third quarter while unemployment remains high, a combination that should keep Fed policy on hold. This is bullish for the stock market.

Friday’s reversal came after GDP beat expectations and stock prices fell on Thursday. On Friday, the employment report showed that a strong economy will not be enough to lower unemployment and force the Federal Reserve’s hand.

One of the Fed’s objectives for quantitative easing is to reduce unemployment. October data showed there were a significant number of jobs created, but the percentage of the population in the workforce fell to a 35-year low. The report also showed an unusually high percentage of part-time jobs in the economy.

These two facts indicate that the unemployment rate might not drop even as thousands of jobs are created. Potential workers that have left the labor force could reenter the workforce when they believe jobs are available. Employers might also be able to expand their businesses without hiring by converting part-time jobs to full-time jobs, which will not impact the overall unemployment rate.

This is a difficult employment environment for the Fed to tackle, and it has tied the end of QE to lower unemployment.

If stocks continue higher, as they should for at least the next month or so, PowerShares QQQ (Nasdaq: QQQ) could be the leader into the end of the year.

The chart below shows QQQ with the KST indicator. This indicator was developed by Martin Pring, who explained its name as follows:

“Tired of hearing market forecasters talking about their indicators as if they were guaranteed to make the user rich, I called it the KST, because it stands for ‘K’now ‘S’ure ‘T’hing. I’ve learned after all my years trading that nothing is a sure thing, but the indicator does offer a good charting rendition of the economic growth path that revolves around the business cycle.”

KST has been on a buy signal for the past 10 weeks. In the past, buying 10 weeks after the initial signal would still have allowed traders to capture significant profits. Over the next seven weeks, QQQ moved higher 70.8% of the time and delivered an average gain of 8.73%. Eight weeks later, QQQ was up 73.9% of the time with an average gain of 9.28%.

There are less than eight weeks until the end of the year, and there are a number of indicators, including KST, pointing to the likelihood of gains over that time.

COT Data Points to More Downside in Gold
SPDR Gold Shares (NYSE: GLD) declined 2.1% last week as the bear market in precious metals continued.

The Commodity Futures Trading Commission (CFTC) finally released updated Commitment of Traders (COT) data, and we learned that the commercials have become bearish while hedge funds grew bullish. That is the same condition we saw when gold was trading near its 52-week high late last year.

In the chart above, the COT data has been converted into an index that places the current data into context. The index ranges from 0 to 100, with 100 indicating the group is more bullish than they have been at any other time in the past six months.

We see that the index for large speculators, which includes hedge funds, is at 100, while the index for commercials is at 0. Commercials are miners and industrial users of gold that know the market best. Bearish commercials are usually seen when prices are declining.

COT data indicates that the gold market is unlikely to move higher in the next few weeks. Traders should continue to avoid buying gold at this time.

This article originally appeared on ProfitableTrading.com:
Market Outlook: Little-Known Indicator Says This Could Be the Best Year-End Trade

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