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Market Wrap

Were Those Jingle Bells I Heard Receding in the Distance?

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Indices across the globe broke out to new multi-year highs during the overnight session, preparing the way for a Santa Claus rally in the U.S., historically slated to begin today. The Fed chipped in to help pay for the party with a hefty $18 billion repo, all a net add according to Jonathan Levinson's notation on OptionInvestor's Market Monitor. With equities rushing higher and bonds turning lower, that money seemed destined to fund the equity party. New couples created by a host of merger and acquisition activity added to the festive spirit.

Party time had arrived. With the other invitees cheering the U.S. on, not even a few disappointments were going to dampen the party spirit for the first few hours. However, the Senate's failure to pass a bill characterized as a must-pass defense bill may have dampened party spirits. Failing to gain the needed sixty votes to ward off a filibuster, sponsors of the bill may now withdraw it to remove the controversial measure to allow drilling in an Alaska wildlife refuge. The bill had also included measures meant to provide money to troops in Iraq, relief for Katrina victims and help with energy bills for low-income families. Some detractors labeled the last-minute insertion of the drilling measure into a bill that would be so difficult to vote down to be legislative blackmail. Some speculate that supporters of opening Alaska's ANWR field to drilling will try again next year by attaching it to a different bill.

By the time the Senate vote had been tallied, market participants had already had time to digest the particulars of the crude inventories release, listen to Richard Federal Reserve President Lacker claim that energy prices could still be passed through, contributing to inflation, and watch crude prices maintain above $58.00. The party was over before Santa Claus even made an appearance.

Annotated Daily Chart of the SPX:

Sectors that contributed to the small gains on many indices included the materials sector. Positive analyst comments on Nucor (NUE) helped the materials sector, with insurers, retailers, oil services and financials being among the sectors that gained. Homebuilders were flat, and the utility sector dropped.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

In overnight trading, the Nikkei briefly climbed above 16,000, a new five-year high, before drifting back to a mere 316-point gain for the day. The news of a single dissenting vote for rate reduction at the Bank of England's meeting this month propelled the FTSE 100 to its highest level in four years. The DAX hit levels last seen in March 2002, although it couldn't quite tag the 2002 high of 5,467.31 achieved on March 19 2002. The CAC 40 topped its 2002 high of 4,720.07, achieved on January 4, 2002, and hit levels not seen since the third quarter of 2001.

Disappointments, at first discounted by the partygoers, came from a few earnings reports and some economic releases, tempered by positive earnings from FDO, ATYT and PALM. Starting the day off, the Mortgage Bankers Association released mortgage applications for the week ending December 16 at 7:00 EST. The market component index was down on both seasonally adjusted and unadjusted measures. Compared to this time last year, that index, measuring mortgage loan application volume, was lower by 15.2 percent. The purchase, refinance and conventional indices all dropped, while the government index was flat. Four-week moving averages dipped for the market, purchase and refinance indices. Refinance activity rose to 41.7 percent of total activity, however, with the average contract interest rate for 30-year fixed-rate mortgages dropping to 6.22 percent from the previous week's 6.28 percent, and with points decreasing, too.

An hour and a half later, the GDP revision surprised to the downside. Most economists and market watchers had expected the final third-quarter GDP to show the same 4.3 percent increase as the previous estimate. Instead, a slightly lower consumer spending figure detracted from the final number, coming in now at 4.1 percent growth. Other revisions included a slight upward revision of the core personal consumption expenditure price index--a measure of inflation--and slight downward revisions of corporate profits and final sales of domestic product. The chain deflator rose to 3.3 percent from the former 3.0 percent, increasing inflation worries.


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Despite the surprise revision lower, the Q3 GDP measures the strongest growth since Q1 2004. The SPX e-minis closed the 15-minute period immediately before the release at 1271.25 and closed pre-market trading at 1271.00, showing little reaction in the pre-market period. The TNX, measuring the ten-year yield, jumped to a high of 44.88, up from yesterday's close of 44.66 and above yesterday's high of 44.78, presaging an eventual climb to a high of 44.98 and a close at 44.86.

The inventories numbers proved surprising, too. While crude inventories rose more than expected, by 1.3 million barrels, gasoline supplies unexpectedly declined by 300,000 barrels and distillates declined by 2.8 million barrels, more than had been expected. The inventories adjustments brought crude inventories above the upper end of the average range for this time of year, but dropped gasoline and distillate inventories into the lower half of the average range for this of year.

During this season, distillates prove the most important component of this release, and the number should have been crude positive and equity negative. According to a Bloomberg TV commentator, the distillate drop was six times deeper than had been anticipated. She quoted a UBS analyst saying that this drop was of particular concern this early in the season.

The climb in crude didn't begin immediately, however, with crude first dropping to its $58.10 low and then continuing to climb. Investors in transports paid more attention to the headline number and sent the transports into a new high, charging above 4200 to a day's high of 4216.80. The TRAN's breakout brought it less than sixty points from a possible target and probable strong resistance level.

Annotated Weekly Chart of the TRAN:

Although not a component stock of the TRAN according to one source, FedEx's (FDX) upside earning surprise propelled some TRAN components higher, too. For its fiscal second quarter, FDX beat expectations by 13 cents and gave encouraging full-year 2006 guidance. The Dow does count FDX as one of its components, and the Dow headed higher, too, before the Senate turned the lights out on its defense bill and perhaps on the equity party, too.

Other early disappointments that the market at first discounted showed up with Nike's (NKE) report that future orders could decelerate and news that Calpine (CPN) had filed for protection from creditors and Kirk Kerkorian's Tracinda had sold about 20 percent of its position in GM.

The new couples showing up for the party early in the day included a much-touted GOOG and AOL pairing. GOOG will take a five percent position in Time Warner's (TWX) AOL, paying $1 billion for the honor. Seagate Technology (STX) has bid for Maxtor (MXO), bidding $1.9 billion. These two comprise two of the largest manufacturers of disk drives. Allergen (AGN) is willing to spend about $3 billion to take over Inamed (IMDC). Reportedly, GE has made an offer for Arden Realty (ARI) in conjunction with unidentified partners. IBM will buy Micromuse (MUSE). Yesterday's news that American International Group (AIG) would acquire $3.5 billion worth of property in Japan boosted morale for AIG and other multi-line insurers.

Although the Senate failed to approve the defense bill, it did pass a bill to trim spending by $40 billion over the next five-year period. It did so only with Vice President Cheney voting in a tie-breaker, however. The bill cuts funds for Medicaid, Medicare and student loans. Because the bill was changed when Democrats forced some provisions to be struck, the bill will require another vote by House members. Although the House is not expected to reconvene until late January, CNBC commentators noted that sometimes arrangements can be made to approve such changes without waiting for all members to return. Lawmakers were looking into such a possibility.

Tomorrow's earnings reports include those from AGE, CAG and GIS.
Economic reports include the typical initial claims at 8:30, but that 8:30 reporting period will also see the releases of November's personal income and personal spending numbers. Leading indicators for November will be released at 10:00, and natural gas inventories, at 10:30.

Charts prove difficult to decipher. Rallies get sold. Bearish rising wedges produced over the last couple of weeks on some indices have been broken to the downside and then retested. The former support held as resistance, suggesting that markets are ready to fall further to probe for stronger resistance. Yet the TRAN broke higher again, and on many other indices prices congregate near recent highs while daily MACD turns lower, not a bearish development. As long as rallies get sold, continue selling rallies, but be ready to exit if proven wrong by upside breaks through those recent consolidation patterns.

Join the commentators on the Market and Future Monitors for live appraisals of the market action. If not compelled to trade each day, this light-volume end of the holiday week might be a good time to test a new indicator with a few paper trades rather than with your hard-earned money.

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