A quick look at the first graphic shows that despite all the volatility for the week the major indexes, with the exception of the Dow and NYSE closed almost exactly where they ended the prior week. Less than a 1-point change on the S&P-500, S&P-100 and Nasdaq 100 should be telling us something.

Market Statistics

The Dow rallied in the afternoon to pull ahead of the pack but the gains were almost entirely due to CAT, Alcoa and 3M. The big news should be that support held and the indexes are once again taking another shot at resistance.

Given the sharp spike in the Consumer Sentiment for December you would expect more than the lackluster market sentiment we had last week. In the first reading on consumer sentiment for December the headline number spiked to 73.4 from November's reading of 67.4. This was a major uptick similar to the jump from 65.7 to 73.5 in September. The high volatility in sentiment is directly related to the publicity surrounding jobs, stock market activity and press comments about the economy.

During the end of November when consumers were surveyed for the final November reading there were several high profile market drops as well as several economic disappointments. For the first week of December when this current survey was taken the markets were setting new highs with the Dow edging over 10500. It was the "new high" headlines and the big improvement in the Non-Farm Payroll report that powered sentiment higher.

The proof that news headlines impacted sentiment is in the components. The current conditions component spiked from 68.8 to 79.1, a gain of more than 10 points. The six-month expectations component rose only 3-points from 66.5 to 69.7. The consumer sentiment headline number is back at the highs for the year and appears to be confirming consumers are expecting a better economy ahead.

Unfortunately that is not the case. Consumers are still pessimistic about the economy. In the recent CNBC Wealth Survey released on Friday there was very little positive change in consumer attitudes. Note in the table below that those feeling the economy has improved increased only slightly. 93% still believe the economy is in the fair/poor category compared to 95% in November 2008. I remember November 2008 vividly and despite the big gains in stabilizing the financial system and the housing markets since November only 2% of responders moved from the fair/poor categories to good. What this does show is once the recovery does find traction it could be explosive as consumers relax and start spending money again. I doubt that will be until late 2010 but it will eventually happen.

State of Economy Table

Consumer Sentiment Chart

The headline number for November retail sales should move a few more consumers into the positive economy category. The headline number showed a gain of +1.3% in November compared to estimates for a gain of +0.6%. That +1.3% is a really strong number, especially following a +1.4% gain in October. However, if you remove autos that lowers it from 1.3% to 1.2%. If you remove gas stations that headline number falls to +0.6%. Rising gasoline prices in November contributed more than 50% of the sales increase. That is not where economists want to see sales increases because it takes money away from consumers. The same was true to October's +1.4% gain. If you take away gas and autos the net sales number was zero.

On the bright side electronic and appliance stores showed a +2.8% gain and building materials dealers saw a +1.0% gain. Anecdotal reports claim the strong electronics sales were due to heavy discounting in an effort to unload inventory. Food and beverage stores also saw a +1.0% gain. Clothing stores and furniture stores both lost -0.7% in November. Continued sales gains for December are expected since there were sharp declines for all three Q4 months of 2008 making year over year comparisons very easy.

Retail Sales Chart

There was a real surprise in the Business Inventory report for October. I know it is a lagging report but it is worth mentioning today. Inventories increased +0.2% in October. While that is a small number it was the first month of inventory gains since August 2008. It was also the second month of a strong rebound from the cycle low in August. Inventories are still down 13.5% year over year but suddenly improving sharply. This is a strong signal that the economy is gaining traction.

The economic reports for the last couple weeks have produced a large improvement in the expectations for Q4 GDP. Some unofficial expectations are starting to move over 5%. That includes an analyst from JP Morgan. That would be a huge number and would create significant ripples in the market and at the Fed. It would force a rethinking of GDP estimates for all of 2010 and probably force the Fed to rethink their "extended period" plan for interest rates. The Q4 GDP estimates are going to be the big story over the next month because the first official Q4 release is not until Jan-29th. Expect a lot of talk about the GDP as we near that release because official estimates are only for 2.6% GDP for all of 2010.

GDP Chart

The calendar for next week is dominated by the FOMC meeting on Tue/Wed. That will be the sole focus for analysts until after the announcement on Wednesday. We know nothing is going to change because Bernanke said as much in his testimony last week. However, in light of the recent economic improvements there could be some change in the language other than the "extended period" comment that will show the Fed is setting up for a bias change. This possible change in bias is going to be the overriding worry in the markets next week.

The Producer Price Index (PPI) and Consumer Price Index (CPI) will give us a rough update on inflation although none is expected. The Philly Fed survey on Thursday is the first of the regional Fed manufacturing surveys for the month.

Economic Calendar

More important than many of the economic reports will be the Best Buy earnings on Tuesday and the FedEx, ORCL, RIMM and PALM earnings on Thursday. This is real rubber on the road details especially in the case of Best Buy. As the largest electronics retailer and without Circuit City to undercut their prices this year the BBY earnings should be decent. Of course it won't be the earnings that attract the most attention but the guidance for Q4. With only two weeks left in the shopping season Best Buy should be in a position to call the game for the rest of the year. If they say sales are good then everyone will benefit. If they whine about weaker sales and smaller margins because of the heavy discounting then everybody else will be painted with the same brush. In BBY rallies to resistance at $47 before the earnings report there could be some fireworks after the report.

Best Buy Chart

Oracle (ORCL), RIMM, Palm, FedEx (FDX) and Nike (NKE) report earnings on Thursday and could be the highlight of the week for stocks. I believe RIMM will outperform and guide higher but that is just my opinion. RIMM just announced a new initiative in China and that is a huge market. RIMM was crushed in September after their earnings and has yet to recover. A good report next week could redeem them from that error. RIMM has some serious volatility around their earnings events. If you guess right you can win big but guess wrong and it could be costly.

Research In Motion Chart

Palm is a pretender to the throne and while all the news outlets will report the earnings it probably won't have any impact because of the shadow from RIMM announcing on the same day. Palm has the potential to surprise but I wonder if anyone will be watching.

Oracle will also be closely watched but rarely followed. Oracle has such a history of lackluster stock performance that few people care what Oracle reports other than their view on the business environment.

Oracle Chart

FedEx will be another one of those critical guidance companies. While FedEx has seen package traffic drop for the year they should be seeing volumes rise again over the holiday season. Since they have a lot of international traffic they could provide guidance of a global nature. Earnings are expected to be $1.05 compared to $1.58 in the year ago quarter.

Darden Restaurants (DRI) will also be viewed as a consumer indicator. Are people staying away from $20 a plate fish at Red Lobster in favor of $12 pasta at Olive Garden? Hopefully Darden will give us some details.

Nike will be watched more closely for what they say about Tiger Woods than how their shoes are selling. As one of Tiger's top endorsement deals what are they going to do with their star taking an "indefinite leave" from the game of golf? The mistress count is up to 12 now and that is a lot to overcome for somebody who was making millions out of being the squeaky clean king of golf. Several advertisers have already dropped him but Nike has stood by him so far.

National Semi reported earnings on Thursday and lost ground on Friday due to worries about their guidance. Earnings beat estimates and guidance was higher than analysts had expected. However, profits came from higher margins rather than increasing sales. Analysts worried that Texas Instruments was taking market share from NSM but strong demand in the sector was masking that market share loss. A Broadpoint AmTech analyst countered that some of that market share loss was deliberate as NSM exited some less profitable segments. Investors were not convinced and NSM lost ground and investors took profits in the sector.

The SEMI Association will report its November Book-to-Bill ratio on Thursday. The ratio in October was 1.1 meaning they got $110 in new orders for every $100 of orders shipped.

NSM Chart

Semiconductor Index Chart

After the close on Friday S&P announced it was replacing Ciena (CIEN) with Visa (V) in the S&P-500. Visa immediately spiked over $3 in after hours. Mead Johnson (MJN) will replace MBIA Corp (MBI). Both replacements will take place after the close of business on Dec-18th. Since Ciena has a market cap of $1 billion and Visa has a market cap of $38 billion that means index fund managers will have to buy a lot more of Visa and sell some of the other 499 stocks on the 18th. This should be good for a strong rally in Visa over the next week.

Mead Johnson is a little different with a market cap of $9 billion and ten times MBIA. Mead Johnson is 83% owned by Bristol Myers Squibb (BMY) and they are splitting off that 83% around the 18th. That means the float on MJN is a lot smaller with average volume of only three million shares. How arbitragers will play this move around the 17% of stock in public hands is unknown. It could either be a giant short squeeze or completely ignored because of details surrounding the 83% owned by BMY. My play would be on Visa, which is already at a 52-week high.

Chart of Visa

China revved up the U.S. market on Friday by reporting the strongest industrial production since June 2007 at 19.2% in November. Expectations were for a gain of 18%, up from 16.1% in October. China's economy is rebounding faster than most expected and that suggests the global economy is also improving. Since China produces goods for the rest of the world the jump in growth suggests somebody is buying those goods. Obviously not all that growth is goods going outside China so the report was also a positive signal for the Chinese economy.

After weeks of incredible volatility where every uptick in the dollar produced losses in equities and commodities a strange thing happened on Friday. The dollar broke out to a six-week high and commodities did not tank. Equities rallied as well. There was normally a direct inverse relationship in the past and that changed on Friday. The reason for the change was the jump in consumer sentiment, retail sales and the first rise in business inventories in 13 months. For analysts that means the U.S. economy is improving better than expected and that produces a stronger dollar. We had the best of both worlds with the dollar and equities both rising.

Just because commodities did not tank does not mean they did not lose ground. It was just a minor loss compared to the sharp declines of the recent past. Gold was off $6 to $1,119 but metals and miners were up on hopes for increased demand. Oil was down but for a different reason.

Crude oil is finally moving back to where prices should be, given the current demand. Consumption in the U.S. is at the lowest level in a decade. The average consumption over the last four-weeks was 18.5 million barrels per day. That was down -563,000 bpd from last year and -2.1 mbpd below the five-year average. Inventory levels of crude are 7.6% above the five-year average and gasoline stocks are near decade highs and 5.4% above the five-year average.

Production is rising in the U.S. thanks to new production in the Gulf of Mexico and new drilling in existing fields onshore. Current inventory levels would support a complete lack of imports for 117 days should something happen on a global scale to impact deliveries. That rises to more than 200 days if the SPR was tapped. Our dependency on imported oil has fallen from 62% to 51% of our current consumption.

Basically, for the immediate future there is a lot more oil in the U.S. than we need. Cheating on OPEC quotas is growing with compliance falling to 58% in November from 60% in October. OPEC production hit a post quota high of 29.1 mbpd in November. With an extra 2 mbpd over quotas now coming out of OPEC and global demand still refusing to rebound the price of crude is finally returning to realistic levels.

I have mentioned in these pages several times that the CEO of Exxon claims there was $20-$25 of dollar weakness in oil prices. That means for every decline of the dollar the price of oil rose as a dollar hedge. With the dollar suddenly finding strength to breakout to a six-week high the price of oil reversed downward.

There is one other factor. Storage at Cushing Oklahoma where the light crude futures are delivered is nearly full because of the over supply. Cushing storage has recently been expanded to about 51.1 million barrels. However, for safety reasons tanks normally are filled only to about 80% capacity for an expected max capacity of somewhere in the 40 million barrel range. Since oil is constantly being added and subtracted from the tank farms rather than just sitting stagnant there is always some portion of the farm in transition. That lowers the actual useable rate to about 36 million barrels. Back in Nov/Dec 2008 that level was reached and oil prices fell dramatically because there was nowhere to deliver new oil.

If Wal-Mart ordering screwed up and a single store received 1,000 bushels of ripe tomatoes instead of 100 bushels guess what would happen to the price of ripe tomatoes at that store? If Cushing is full guess what happens to the price of crude to be delivered to Cushing? Correct, the price must go down to offset a higher storage rate elsewhere until Cushing storage frees up. The EIA reported on Wednesday that oil in storage at Cushing rose to 33.4 million barrels last week. With the January futures expiring on December 21st anyone in actual possession of oil with the intent to deliver to Cushing is going to be slashing the price in an effort to pass that problem to someone else.

Expiring January light crude futures for Cushing delivery closed at $69.87 on Friday. Brent Light Crude, which does not have the Cushing storage problem closed at $71.70. February crude futures, which is still five weeks away from the expiration/storage problem closed at $71.95. That spread between the January and February futures prices, called contango, widened to more than $8 between current expiring contract and the next months contract back in December 2008. I am not saying we are going there next week but seeing an increase in contango (a wider spread) is definitely a possibility.

I warned several times back in late October, early November when oil was over $80 that I expected to see $70 before we saw $85. That prediction has now come to pass. I will be honest, I wanted to buy $70 oil all last week because I thought that was decent support but the numbers out on Friday suggest we could be going lower. That would especially be true if the dollar continues to rise.

In the third chart below the February crude futures have the same converging support lines at $70. A dip to $70 on the Feb futures would be a buy signal for a trade in the energy sector.

Crude Oil Futures Comparison

January Crude Oil Futures Chart

February Crude Oil Futures Chart

The Dollar index has broken out of its downtrend channel and is testing resistance at 76.6. If this resistance fails the resulting rally could be violent because of the heavy short interest. The economic reports from Friday gave those bullish on the dollar added confidence and added a half point gain to the index. The fall in gold prices has been directly related to the breakout of the dollar. Gold appears to be headed for support at $1,100 but its fate rests on the dollar's strength.

Dollar Index Chart

Gold Chart

The FDIC closed three more banks on Friday bringing the total for the year to 133. The failed banks were Republic Federal in Florida, Solutions Bank in Kansas and Valley Capital Bank in Arizona. The total cost to the FDIC for all three closures was $252 million. The FDIC fund now has a negative balance due to the escalating pace of failures. The FDIC is replenishing the fund by having banks prepay three years of fees to the FDIC. FDIC Chief Shelia Blair told lawmakers on Friday that toxic assets were still a problem for banks, especially small banks. However, she also said that conditions were starting to improve in the banking industry but the pace of failures would remain elevated for 2010.

This week is the one-year anniversary of the Bernie Madoff scandal. How fast time flies! Bernie may be serving out his 150-year sentence in North Carolina but the prosecutor is still on the hunt. Money manager Stanley Chais and the funds he ran are under criminal investigation as a possible conspirator. Chais is also being sued in a civil lawsuit for return of funds.

The SEC also sued him saying he continued to place investor money with Madoff despite having "clear indications" that Madoff was engaged in fraudulent behavior. The government believes Chais committed conspiracy, mail fraud, wire fraud and money laundering for his part in the scheme. The SEC claimed Chais placed $900 million with Madoff and collected some $770 million in fees. Chais reportedly provided his own investors with false account statements and asked Madoff never to report losses on the statements regarding accounts placed by Chais. Chais claims he was duped by Madoff.

As I mentioned earlier, with the exception of the Dow, the markets traded flat for the week. Unfortunately that does not mean there was no volatility. The Dow and S&P returned to critical support then rebounded again as they have done each week since November 16th. The market is very range bound and lacked a catalyst to push it higher.

At least it lacked a catalyst until Friday's economic reports. If investors actually believe the various reports then the markets could be primed to move higher in 2010 and ppossibly even move higher next week. I would not bet on it today. There is a reason why the markets are range bound. Actually there are several reasons. One is the lack of a catalyst. I would be surprised if the business inventories report was the catalyst or the bogus retail sales report or consumer sentiment but the dollar and the Dow/S&P did rally together on the news and that is encouraging.

I believe China's factory production hitting 19% in November was also part of the reason to rally. However, that is now old news and there is a Fed meeting in our immediate future. Stocks are not likely to rally much ahead of the Fed. Once past the Fed meeting we will be hitting the holiday vacations and volume will slow to a crawl. While late December has shown some nice rallies in the past there is a cause for worry.

Many funds and institutions are sitting on monster gains from the rebound since March. The Dow is up +61% from its lows and the S&P +66%. That is a good decade of gains and it came in only nine months. There are many funds, institutions and money managers just counting the days until January so they can close those positions and take those gains. If they sell them now in 2009 they have to pay taxes almost immediately. If they wait three weeks and sell them in January they can postpone those taxes for a year.

This means quite a few managers are going to be sitting on their hands for the next couple of weeks and praying that the market does not tank. I am sure there will be some additional window dressing in hopes of keeping the market at its highs into year-end. That window dressing could keep us inching slowly higher until January 4th. I would be surprised to see a huge gain for the rest of December.

The wildcard here is professional traders trying to front run any potential January dip. Do they sell into any Santa Claus rally or do they tag along for the ride into January? It will be interesting to find out. Meanwhile we need to keep our stops tight and try not to be married to our positions.

The Dow closed at 10,471 and just a few points from current resistance at 10500. Assuming Asia does not tank Sunday night we should see another test of that 10,500 level on Monday. If we did actually move over 10500 the Dow would then target 10,650 as the next resistance level. I would be extremely surprised if we made it to or through that level by year-end but stranger things have happened. A breakout over 10,500 could cause some short covering and put us into a new range. However, we have been in the 10,250-10,500 range for over 4-weeks and nothing has been able to break the deadlock.

Dow Chart

The S&P-500 declined to exactly 1085 once again on Wednesday and then returned to 1110 as though stuck in a time warp. The S&P returned to 1085 four times over the last four weeks and each time rebounding to 1100. Only this week it missed the upper mark by a hair. Is it just a rounding error to a high of 1108.50 or a preview of things to come? The S&P has not been as strong as the Dow's repeated attempts at new highs. That 1110 level seems to hold bad memories and the return appears tentative. It could be traders just jumping the gun on their next short at resistance that kept it from hitting the market on Friday. If it were me that is where I would be pulling the trigger rather than wait for an exact touch of 1100.

You may remember my S&P charts from the last several weeks where it had fallen below the uptrend support line. It has been range bound for so long that if finally moved far enough outside the channel that the original line lost relevance. I redrew it this week to show the new trend. That uptrend line crossed right through 1085 on Wednesday and that is when the S&P began to rebound. The problem is that a new decline to 1085 will be outside the uptrend support again, and suggest another failure. This range bound pattern of the last four weeks will eventually end. I have heard various technical ideas that it is either a bullish consolidation that will break to the upside OR it is a topping process that will eventually breakdown. I believe we will find out the answer to that quiz the first week of January.

S&P-500 Chart

The Nasdaq could not cling to green on Friday and finished with a loss of -4 points for the week. It was a respectable showing despite the loss because it returned to only 10 points below resistance. The midweek decline totaled -40 points but it recovered nearly all of that loss.

That resistance at 2200 has been rock solid since Nov-16th. However, we do have a pattern of higher lows and the Nasdaq is wedging nicely into a breakout pattern. Techs are expected to lead the way in 2010 so investors are continuing to buy the dip. Support is 2160.

Nasdaq Composite Chart

The Nasdaq 100 (NDX) stubbed its toe on Friday and gave back -7 points to end the week with only a .15 gain after moving in a 50-point range. I was asking James on Friday if he knew what tanked the NDX. The first six charts we pulled up included AAPL, RIMM, BRCM, AMZN, QCOM and INTC were all negative for the day. Apple, RIMM and Broadcom accounted for 5 of the -7 points in the NDX drop.
Excellent link here for flash quotes on all 100 NDX stocks

I understand BRCM, INTC and even QCOM being down on the sell off in chips but Apple is just getting pummeled for no apparent reason. The rebound to $200 on Thursday is a distant memory with a $194 close on Friday. If the big tech stocks can't post gains then the composite is going to continue to struggle to get over resistance at 2200.

Nasdaq 100 Chart

I am bringing back an old chart today because I think it is relative to our challenge for the next two weeks. The NYSE Composite ($NYA) is an index of all 2000+ stocks on the NYSE. This ranges from the very large like Exxon Mobil to the very small with pocket change for a market cap. Over 360 are foreign stocks and ADRs. It is a broad view of the market similar to the Wilshire 5000 but not so broad as to be immune from all but the biggest events. The NYSE has been trading in a 200-point range from 7,050 to 7,250 for the same 4-week period.

The NYSE is relative because the pattern is different. As opposed to the Dow & SPX and Nasdaq where they closed at the high end of their range on Friday the NYSE Composite closed nearer to the bottom of its range. The NYSE appears weaker than the other major indexes. I believe this is because it has a full spectrum of stock sizes. Small caps are being under appreciated and the large caps that are acting as safe deposit boxes for excess cash are diffused because of their numbers.

The NYSE Composite has posted a lower low on each of the last two dips. Friday's high was a lower high. I believe we should watch the NYSE next week for additional signs of broad market weakness. By combining it with the Russell-2000 we should be able to get advance warning of any coming change in the market.

NOTE on the opening index graphic that the NYSE lost -57 points for the week while all the other losing indexes were in single digits.

NYSE Composite Chart

The Russell was very disappointing last week. It only lost -2 points for the week but more than once it was negative while the other indexes were in the green. The range was very narrow from 592 to 606 but the amount of movement became progressively smaller as the week progressed. There was definitely no buying support and no signs of bullishness. The Russell was a negative indicator for me last week. When coupled with the NYSE Composite I think they are telegraphing future weakness. I would run to the sidelines if the Russell trades under 592.

Russell Chart

In summary, there are some catalysts suggesting the U.S. economy as well as China's is gaining traction. These reports are putting upward pressure on the dollar and making some investors more comfortable with the outlook for 2010. However, the range bound market is also telling us that the bullish sentiment from the +60% rally from March may be fading.

There are signs that some money managers may be just biding time until January to dump stocks for tax reasons. That could also lead to some additional window dressing into year-end.

The big caps are leading again and that also suggests managers are just using them as safe deposit boxes for cash until New Years Eve. Watch the Russell-2000 and the NYSE Composite ($NYA) as leading indicators of market direction. Be prepared for volatility on Wednesday around the Fed announcement. If they change it to a more hawkish stance be prepared for extreme volatility.

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