Finish Your Holiday Shopping. The Market Will Trade in A tight Range!

December 23, 2009

Trading volumes will really fall off the next two days and I don’t believe we will see a big move in either direction. Often, the market can swing wildly when the big money is away. That does not appear to be the case this week.

Yesterday, Q3 GDP came in much lighter than expected. Analysts were looking for 2.8% growth and we came in at 2.2% growth. If you strip out cash for clunkers, growth would have been less then 1%. That begs the question, “Will this economy grow without government stimulus?”

Economists believe that consumer spending, business inventories and improved trade balance will lead to a 4% GDP growth rate in Q4. After three consecutive downward revisions to Q3 GDP, I’m not as optimistic.

Overnight, New Zealand announced a much weaker than expected growth rate and GDP was flat showing a .2% increase. They are a relatively small economy, but mining is a significant part of their growth. They were one of the first nations to raise interest rates and their growth projections were wrong. The entire global recovery theory feels suspicious and this is simply another red flag.

New home sales came in much lower than expected this morning. They fell 11.7% in November. With a huge inventory of existing homes that are selling below the cost of construction, I’m not surprised. This supply needs to be worked off and banks are still sitting on foreclosures. That means many homes are not even on the market yet. From 2002 – 2007 50% of our employment growth was tied to housing (builders, lenders, realtors, materials). This sector has a huge influence on our overall economy and residential construction will stall with numbers like this.

There has been enough news to move the market, but it is very comfortable in this tight trading range at the highs of the year. Wall Street would love to have it close right here so that nice bonus checks can get cut. They are propping up the market, but profit takers are there to contain any breakout. This is why the range today and tomorrow will be small.

The Santa Claus rally will officially start tomorrow and it encompasses the last five trading days of the year and the first two trading days of the new year. It has a 75% win ratio and on average the Dow Jones is up about 1.4%. This data goes back over 40 years. I don’t like fading such a strong statistical event, so I will temper my bearishness. I have reason to believe that we will see a decline next week.

I believe profit-taking will set in and capital gains tax hikes in 2010 will prompt some investors to get out of stocks. If the Santa Claus rally fails to materialize, traders will consider this a warning shot for 2010.

For those of you starting your vacation early, may you and your family be blessed this holiday season!image


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December 22, 2009

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