Will Santa Provide a Rally or Will Grinch Steal the Day?

The broad markets closed out last week near the November high. Do we break higher and take the next leg in the current uptrend or pullback and test support? Investors looking for the Santa rally are hoping for the break higher and Grinch thinks the market is overbought and due for a pullback or correction. We could argue both sides, but for now the Santa rally has the upper hand.

Looking at the S&P 500 index we closed at 1224 which is the November high. That level was the last attempt at breaking above the April high which reversed and tested support at 1173. The rally last week was based on economic data improving in the US, China and India. The potential resolution to the credit challenges facing Europe was a bonus to the move as well. The outlook now has shifted toward Washington and renewal of the tax cuts. This will be a key element for the market direction.

Expect the trading range of 1173 - 1224 to develop if we don't get quick resolution on the tax outlook. Europe is still a concern as the headlines over the weekend were still focused on the longer term resolution to the credit issues facing the EU. Santa is hoping for a sound economic data to continue and some support from the balance of the globe on growth.

Sectors to watch this week include financials, technology, commodities and retail.

Financials made a key move higher on Thursday after it was reported the ECB was buying European bonds similar to the Fed in the US. That helped the credit markets rally and gave a boost to the US banking sector. This would be a big boost for Santa if the financials would gain some upward momentum to break from the recent trading range. The attempt in November failed with another test of support near the 260 level on the index. I am looking for a follow through move above 270 this week.

Technology continues to provide solid leadership for the broad markets. The semiconductors have provided the leadership with a solid move from both software and networking stocks last week. Watch for this leadership to continue if Santa is to win the race towards year end. If the sector tests lower it could keep the broad market in the trading range discussed above.

Commodities are back and providing leadership for energy, industrials and basic materials. Watch for the move to continue if the global news for demand remains. China and India provided the catalyst last week on news that demand for crude and base metals rose in November. The US reported higher demand for gasoline which translates into crude demand rising. Watch all three major components of commodities to continue higher. Agriculture, energy and metals all are resuming their uptrend with energy leading the way. Natural gas is making a move off the lows and is setting up for a run higher. The cold weather will be a catalyst short term. Definitely one of the sectors to watch moving forward.

Retail has hit an new high again after the sales data for November showed a rise of 6% and well ahead of expectations. The stocks have seen a strong move to the upside and there is some concern of the sector being overextended and due for a pullback. No one has a crystal ball, but protecting against the downside risk is what money management is all about. Set your stops according to the risk you are willing to accept and let the upside run as long as buyers are willing to step in.

The markets closed at or near resistance on Friday. Expect some volatility throughout the week based on the data released and the headlines from Europe. Be patient and take what the market gives one day at a time. Santa is on his way, but Grinch is still plotting how to steal Christmas.

 

Disclosure Statement: Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com as well as the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.