As usual when the market is rallying, the focus is on the positive news events and economic reports, as reasons for a rally to continue. And during pullbacks, the focus is on the negative reports as reasons why this time might be the beginning of more than just a pullback.
Economic reports were mixed this week:
The Chicago Fed’s National Business Activity Index improved to 0.73 from 0.31 in October. But Existing Home Sales fell 6.1% in November, to a seasonally adjusted rate of 4.93 million. It was the slowest sales rate in six months, missing the consensus forecast of 5.18 million.
Durable Goods Orders unexpectedly fell 0.7% in November, versus the consensus forecast for a rise of 3.3%. It was the third straight monthly decline. But third quarter GDP growth was revised up dramatically, from 3.9%, to 5.0%, its fastest quarterly growth in 11 years.
Consumer Sentiment as measured by the University of Michigan/Thomson Reuters, came in at 93.6 in December, its highest level since 2007. But New Home Sales fell 1.6% in November.
Santa Claus rallies, January effects, etc.
Also as usual, attempts are being made to determine market direction via conjecture about the dismal year most hedge funds had this year, and how they might set up for next year, the effect of a ‘Santa Claus rally’, the ‘January effect’, ‘As goes the first five-days of January so goes the month’, ‘As goes the month of January so goes the year’, a string of up-days is usually followed by a string of down-days (and vice versa), and so on.
In reality, there is not much that can be read into the market activity in these holiday-shortened weeks as far as market direction next year, or even in January. Many participants are absent, as evidenced by the low trading volume. And much of what activity there is, is related to tax planning, taking gains or losses in this tax year or making efforts to slide them over into next year, depending on individual circumstances, as well as end-of-year ‘window-dressing’ by mutual funds and money-management firms.
December is usually a positive month, one of the two or three most consistently positive months of the year. It didn’t start out so well, but looks like it will probably follow the pattern, with the Dow now up 1.3% for the month so far, with only two trading days to go.
Reasons for knowing volatility will continue.
As is normal, investor sentiment reached warning zone high levels of bullishness, low levels of bearishness prior to the recent pullback, with AAII poll bullishness at 58% and bearishness at 15% in November.
Sentiment cooled off in the pullback, especially after the ‘worst market week in years’ a couple of weeks ago, bullishness down to 38.7%, bearishness up to 26.9%.
But, after a couple of weeks of impressive rally, this week’s poll showed the bullish percentage is rising again, at 50.9%, and bearishness has dropped to 18.9%.
Meanwhile, the VIX Index, also known as The Fear Index, which spiked up to fear levels in the recent market pullback, has begun to drop back down into the low fear zone.
And, the sharp spike-up rally has market indexes and short-term technical indicators approaching short-term overbought conditions again.
So we can be sure volatility will continue.
We will depend on our technical indicators to continue providing short-term signals regarding volatility, while we invest via our intermediate-term indicators, for the U.S. stock market and sectors, buy and sell signals on individual global markets, bonds, and gold.
A lazy blog post again today, enjoying the holidays, and restoring energy for the new year, which I expect is going to be interesting and important.
Zacks Investment Research: “Many investors expect the good run to continue into 2015 as well, but a lot will depend on how the markets respond to the Fed policy change that is expected to start around the middle of the year. The Fed is going out of its way to promise that it will remain ‘patient’ in raising rates, but they may not have full control of the situation if GDP growth turns out to be anything like what we saw in the last two quarters. . . . . . . . However, we spent a big part of 2013 worrying about what will happen once the Fed started to ‘Taper’ its QE program. Few of us could have foreseen how smooth and uneventful the change turned out to be. If the market’s reaction to the first rate hike sometime around the middle of 2015 is similar to how it responded to the end of QE, then we can justifiably look ahead to another positive year for stocks.”
Stephen S. Roach, Market Watch: ‘The Fed Is Heading for Another Catastrophe’:“America’s Federal Reserve is headed down a familiar — and highly dangerous — path. Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic. . . . . This bears an eerie resemblance to the script of 2004-2006, when the Fed’s incremental approach led to the near-fatal mistake of condoning mounting excesses in financial markets and the real economy. After pushing the federal funds rate to a 45-year low of 1% following the collapse of the equity bubble of the early 2000s, the Fed delayed policy normalization for an inordinately long period. And when it finally began to raise the benchmark rate, it did so excruciatingly slowly. . . . . given ongoing concerns about post-crisis vulnerabilities and deflation risk, today’s Fed seems likely to find any excuse to prolong its incremental normalization, taking a slower pace than it adopted a decade ago.”
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Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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