With five trading days left before Christmas the market is already winding down and excitement over the potential year-end rally is fading.

Market Statistics

If it were not for the positive economics this morning we would have had no market action at all. The volume is fading even with option expiration tomorrow. Once the bell rings on Friday the market will be unofficially closed for the year. Fund managers have shuffled their portfolios and over and over and finally have their final year-end configuration. While there will be someone manning the trading desks until year end it will only be a skeleton crew. As volume declines further the volatility may increase but the big moves should be over.

The economics this morning spurred a few traders into action with the Philly Fed Survey leading the list of surprises. The headline number on the Philly Fed Manufacturing Survey for December rose to 24.3 from 22.5 in November. That may not sound like a big gain but the consensus estimates were for a decline to 15.0. Compared to an expected drop it was a great number. It was also the highest level for the index since 2005.

New orders and backorders both rose slightly but the big gains came from lesser-noticed components. Prices received jumped from -2.1 to +10.7 and the average workweek rose to 19.3 from 10.9. The jump in hours suggests the employment component should rise in future months. That would be good since it fell from 13.3 to 5.1 in December. The prices paid component rose sharply to 51.2 from 34.0 and suggests inflation is rising on raw materials. This was the highest level since July 2008. Capital expenditure plans rose from 20.2 to 30.1 for a big boost and also suggest employment could begin to improve soon.

The Philly Fed gains suggest the recovery is accelerating, price inflation is beginning improve and deflation risks are declining.

Philly Fed Survey Chart

Jobless claims fell slightly to 420,000, a decline if 3,000. This was not as much as some had expected and could be nearing the short-term bottom. Once the holidays are behind us hundreds of thousands of workers who took part time or temporary jobs for the holidays will be looking for work again. The weekly jobless claims should rise again in January.

New Residential Construction rose to 555,000 units in November from 519,000 units in October. Single-family permits rose by +3%. Housing completions totaled 513,000, which is a 14% decline from October and a new record low. Single-family completions declined -10% and multifamily declined -23%.

It appears builders are ramping up construction in preparation for what they believe will be a decent selling season next spring. We are still far off the pace of building during normal cycles but any improvement is appreciated. Analysts believe the pace of building won't ramp up significantly until 2012 when annualized units should again move over the one million mark. The large amount of distressed homes still on the market is weighing on the new home market.

The blast of winter weather caused a sharp draw from natural gas in storage. The weekly gas report showed a withdrawal of 164.0 bcf from storage. That number was roughly inline with estimates and we could see an even bigger draw next week with continued cold weather across most of the nation. Despite the big draw on supplies the price of gas continued its weeklong plunge to end just above $4. Inventories are still at near record levels.

Natural Gas Chart

There are no economic reports on Friday with the ability to move the market. State income, risk of recession, regional employment and CB Leading Indicators are mostly ignored.

MasterCard and Visa were crushed today after the government outlined new fee restrictions for debit cards. Shares of Visa lost -12.7% and MasterCard -10.3%. The new fee proposal would limit transaction fees to 12-cents compared to the average interchange fee today of 44-cents. Card issuers may also be required to offer services over multiple networks, which would increase competition and narrow profits even further. This is more of a problem for MasterCard and Visa than the banks that actually issue the cards. The fee changes won't hurt large card issuing banks like Citigroup and Bank America. This is a direct attack on the transaction costs that drive up expenses for everyone in the payment chain. The changes are required by the Dodd-Frank financial industry reforms signed into law last July. The Fed is required by law to put out a final ruling on the fees by April 21st and enact the changes in July.

Visa Chart

Research in Motion (RIMM) posted earnings of $1.74 that easily beat estimates of $1.65. Revenue was up +19% from Q2 and +40% over the year ago quarter at $5.49 billion. RIMM also raised guidance to $1.80 from $1.74 or the current quarter and analysts were expecting $1.61. Gross margin also rose to 43.6% from 42%. Net subscriber additions were 5.1 million new BlackBerry users and sales of new BlackBerry phones rose 14.2 million. That represents a lot of current subscribers upgrading to the new models. These earnings and sales numbers and the guidance up grade should dissuade those who believe the iPhone and Android have killed the BlackBerry. The first real smartphone is alive and well. RIMM shares were up a couple dollars in after hours trading.

Research in Motion Chart

Oracle (ORCL) posted profits of 51-cents topping analyst estimates of 46-cents. Revenue jumped +47% to $8.58 billion. The spike was influenced by the addition of Sun Microsystems to Oracle's books. Oracle did not yet own Sun in Q3 of 2009. Revenue for new software licenses rose 21% to $2 billion compared to prior forecasts of +16%. Oracle predicted gains of 10-20% in Q4. Oracle also raised Q4 guidance to a median of 49-cents compares to analyst estimates of 46-cents.

Oracle Chart

FedEx reported earnings before the bell and missed estimates by a mile. The earnings of $1.16 were well below the estimates for $1.31. Operating margins were 6.3%. The two biggest expenses was a reinstatement of employee compensation programs that had been put on hold during the recession and the sharp increase in fuel costs. They are also incurring extra costs as they restructure the freight segment.

The stock was hammered at the open for about a $4 loss to $89 but immediately rallied back to close up +1.83 after the conference call. FedEx raised guidance saying volume growth was stronger and expenses were going to be lower. Global volume in Q4 is exploding and their cost cutting measures over the last two years are going to reap large gains. They raised full year guidance to $5.00 to $5.30 from $4.80 to $5.25.

From what FedEx said about volume trends it appears not only is the U.S. economy accelerating but the global economy as well. Of course they pointed out that China was the biggest volume increase.

Federal Express Chart

The market was also confused by the mixed signals coming out of Washington on the tax compromise bill. Various factions in the house were trying to stall the bill or modify it in some way to make it appear they were not simply caving in to the President and the republicans. However, slowly but surely it is winding its way through the House process and could be voted on as early as tonight or first thing Friday morning. Most analysts believe it will eventually pass in its original form. This should remove one more reason for worry from the market with a tax freeze for the next two years and some additional benefits for businesses. This would be a nice way to end the year and I think the market would move higher once the bill is signed.

We are seeing some profit taking in some of the momentum issues of the last quarter. Gold fell $15, oil is trending lower, silver and copper are also lower. Some highflying tech stocks have been sold over the last week as traders take profits to offset losses in other areas. This is probably what we are going to see the rest of the year. The broader market is likely to rise but individual issues with big gains could see some selling. After a year of some extreme volatility we could end the year with a whimper.

The S&P finally posted a decent gain after several days of struggling to stay afloat. The SPX closed at 1243 and just a decent day away from 1250 and the level most analysts were predicting for year-end back in January. You don't think they will try to pin the index to that number next week just to say, "We told you so." We would be fools not to think they would not at least try.

Initial support is 1235 followed by 1228 and I really wish we would not have to see a print at those levels again this year. However, I would be happy with any close higher than we are today. Resistance is 1250 and again at 1270.

S&P-500 Chart

The Dow pulled back to use the November resistance highs at 11,445 as support and managed to return to 11,500 but no higher. There appears to be a lack of conviction, which is probably more of a lack of involvement with traders shutting down for the year. If the tax bill is approved it should give us one more small sentiment push that could give us that breakout spike.

However, closing the year at the highs for the year is a good recipe for a January decline. We need to be thinking about that possibility as we accumulate positions going into year-end. Support on the Dow is 11,445 and resistance just over the close at 11,510.

Dow Chart

The Nasdaq continues to look weak to me. The breakdown in several big cap techs could continue into year-end as traders take profits. However, we could also see funds prop up these big caps until year-end to make their portfolios look better in the year-end statements.

This makes me neutral on the tech sector. There is resistance at 2640 and 2650. Support is well below at 2600. I believe the tech sector is going to be a stock pickers market for the next couple weeks but I would love to be proven wrong.

Nasdaq Chart

The Russell chart looks identical to the Nasdaq. The strong bullish conviction of the last month has faded now that fund managers have finished loading their portfolios for year-end statements. I could easily see the Russell treading water between 765-780 until year-end unless we get some news event to break the monotony.

Russell Chart

The Dow Transports rallied for 1.34% today thanks to the FedEx earnings and the Philly Fed Survey but that only took it back to strong resistance at 5100. The transports have also lost their bullish conviction. A move over 5100 should pull the broader markets higher but a failure there would be a warning sign the year-end rally is over.

Dow Transports Chart

In summary the anticipation of a tax deal provided a market boost for a couple weeks but that is already priced into the market today. If a deal is done we could see a return of the trend higher but I don't see a big spike on short covering. It is already old news.

The European debt problems have moved from Ireland to Spain and analysts are starting to discuss how a Spanish bailout would be handled. Spain is significantly bigger than the other failing countries and the current bail out loan guarantees in place could not handle a bailout of Spain. We are still weeks away from this becoming a problem but the sharks are circling. If it happens it will be much worse than Ireland. The markets are going to be watching this development mature.

Friday is option expiration but our volatility for this period is already behind us. I would expect the markets to be calm unless driven by an external news event. Friday before Christmas is usually a vacation day for traders as they hit the malls. This means volume should dry up rather quickly and volatility along with it.

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Don't fight the Fed!

Jim Brown

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