Christmas Cheer or Lump of Coal? (SPY, DIA, IWM, TLT)

By John Nyaradi, Wall Street Sector Selector

Markets powered higher last week and we remain in “green flag” status since repositioning our portfolios on December 3rd.    

This week will be the last full trading week of the year and markets are overbought and overextended but seem positioned for more gains as we head towards 2011. 

Looking At My Screens
 

 Chart courtesy of http://www.stockcharts.com

 In the chart above we can see how the S&P 500 broke into new territory with a double top breakout on December 7th.  A “sell” signal would be generated with a break below 1190 and you can see signifcant support at the 1210-1220 level.

 The View from 35,000 Feet

Big news last week came from China where the inflation rate came in at 5% and so prompted more speculation about an impending interest rate hike.

 At home,  bullish optimism among U.S. investors remains at extreme levels while the yield on the 10 year Treasury rose to highs last seen in August, 2009, and consumer confidence rose from 71.6% to a better than expected 74.2%.  Jobless claims declined to 421,000 from 438,000 previous and 425,000 expected. 

Many economists are making upward revisions to their forecasts for 2011 economic growth based on the assumption that the Bush tax cuts will be extended by Congress this week.  Of course, how to pay for this all remains a discussion for another day. 

The Fed announced they would be buying $105 Billion in assets between December 13 and January 11 in their ongoing “QE2″ efforts while Representative Ron Paul will be Chairman of the House Domestic Monetary Policy Committee which oversees the Fed.  This will be interesting to watch as Ron Paul has written a book called “End The Fed.” 

Overseas, Fitch dropped its credit rating on Ireland while German Chancellor Merkel said the future of the Euro is non negotiable.  Quite likely we will see more acts in this drama unfolding in the new year. 

 What It All Means 

As we head for Christmas and year end, the “Santa Rally” remains firmly in place, although overbought conditions, complacency and low volumes could generate significant volatility in the last trading days of the year.  Fundamentals appear to be improving based on actions by the Fed and Congress, while technically, new highs have been reached and a solid floor rests beneath major indexes. 

A misstep by Congress regarding the tax cut legislation or an interest rate hike by China are potential negatives facing the coming week's activity. 

We remain in “green flag” status, expecting higher prices ahead.

 Probability favors Christmas cheer versus a lump of coal in our stockings this year.  

The Week Ahead

The week will bring lots of economic reports and earnings from important companies like Best Buy on Tuesday, and FedEx and Oracle on Thursday. 

Tuesday: November Producer Price Index, November Retail Sales, FOMC meeting/statement 

Wednesday: November Consumer Price Index, December Empire State Index, November Industrial Production, December Homebuilders Index

Thursday: Initial and continuing unemployment claims, November Housing Starts, December Philadelphia Fed

 Friday: November Leading Economic Indicators 

Sector Spotlight: 

Winners: Viet Nam(VNM), Financials (XLF)   

Losers: Turkey (TUR), Brazil (EWZ), 10 Year Bonds (TLH) 

Friday evening I went for a walk in the snowy darkness and passed a darkened home that had been foreclosed upon earlier this year.  In stark contrast, the home next door had a bright Chritsmas tree in its living room window, but there was little cheer in that scene except to hope that maybe recent dark days are behind us.

 Good Holiday Reading