Morning Tack: “Santa Rally”

Morning Tack: “Santa Rally”

"If Santa fails to call, the bears will roam on Broad and Wall!"
. . . Lucien Hooper, a Wall Street icon

The aforementioned quote came to mind yesterday, not because I think there is going to be a major decline, but because I got so many emails from folks who are worried about just that; a major decline. As often stated, I don't think a major decline is in the cards. In fact, I believe any pullback we get from here actually sets up the fabled Santa rally. Admittedly, I would have preferred to see the market's decline, which began last week, not be interrupted by Friday's Dow Wow of some 198 points, but they don't operate the market for my benefit. Yesterday, we got some pretty good news, in that it appears a budget deal is at hand. For weeks I have stated the upcoming budget discussions were not going to be nearly as contentious as last October's, and presto, Paul Ryan and Patty Murray announced such an agreement yesterday. This is a two year deal to fund the government, eliminating the threat of another shutdown. Discretionary spending is raised above sequester levels by $64 billion over the next two years. Also on the good news side of the ledger, the Trucking Survey had its biggest surge in six years (there is a strong correlation, or R2, between truckers and GDP), the Christmas tree sales surveys leaped 12% (improving the outlook for Christmas merchandise sales), there is also a high R2 between the stock market's action prior to Christmas and merchandise sales (currently calling for +5% sales YoY), and the "good news" list goes on. On the downside, Residential Construction Spending has hooked down (see chart). It is hard to see how housing weakens much more without impacting the overall economy.

Surprisingly, the stock market turned a deaf ear to the good news yesterday. This should come as no surprise since the timing models have suggested a window of downside vulnerability between mid-November and mid-December. Yesterday the S&P 500 (SPX/1782.22) moved back below its recent trading range zone of before last Friday's employment numbers. Said move also caused the SPX to see its 10-day moving average (DMA) cross below its 50-DMA; and, you can read that as cautionary! While yesterday's decline was intense, it failed to register as a 90% downside day, meaning that less than 90% of total volume traded, and total points lost, came on the downside. That means that sellers tended to NOT be totally exhausted on the downside! This morning it is more of the same with the preopening futures marginally lower. So we wait, at least on a short-term trading basis. Longer term I remain pretty bullish, yet in the short run I think the outlook is sketchy...

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