President Obama signed the tax compromise into law on Friday but European debt fears kept the bulls from celebrating.

Market Statistics

Friday started off with Moody's slashing Ireland's debt rating by five notches to Baa1 from Aa2 and they continued their negative outlook and warned about further downgrades if the country cannot stabilize its debt situation. This followed the move by Fitch last week to cut the debt to BBB+, a three-notch downgrade. S&P is the only ratings agency left with Ireland still in the A rated band but you can bet they will follow suit soon.

The downgrade had been expected but the severity of the downgrade was unsettling to the markets. Moody's put Spain on review for a possible downgrade on Wednesday on worries about a similar credit crisis in 2011. S&P put Belgium's debt rating on credit watch because of worries over the government and the debt reduction goals.

These downgrades continued to keep the market off balance despite some decent economic news.

The Conference Board index of leading economic indicators rose by a very sharp +1.1 points for November. That was the biggest gain since March. Nine of the survey's ten components increased. The only drag on the index was a decline in building permits. The three-month annualized rate accelerated to 8.6%. That is the fastest growth since March.

The internal components point to a 3.0% rate of GDP growth in Q4. The odds of a double dip recession are decreasing sharply. Hiring is improving at least on a temporary basis and it is expected to accelerate in the spring of 2011.

Jobless Claims declined only slightly last week but it was enough to push the four-week moving average to 423,000 and the lowest level in two years. Using the four-week average filters out the week-to-week volatility.

The regional employment report on Friday showed nonfarm payroll employment declined in 28 states but only three were statistically significant. This continues to improve although very slowly. The tax deal signed on Friday should improve employment fairly quickly because of the accelerated write offs for business.

For next week the only material report will be the final GDP revision for Q3 on Wednesday. Estimates are for a small rise to +2.6% growth.

We will also have the normal weekly reports plus the November housing data. I don't think the housing reports will interest the markets because it is not a selling season. We know sales have declined but that is old news.

Economic Calendar

The FDIC closed six banks on Friday. Three in Georgia and one each in Florida, Arkansas and Minnesota. That raises the total for the year to 157. Florida has been hard hit with 29 banks closed and Georgia has seen 21 banks closed. The number of banks on the FDIC "problem" list rose to 860 in Q3 from 829 in Q2.

The two companies who reported earnings after the close on Thursday held their gains in Friday's lackluster trading. Research in Motion (RIMM) manage to hold on to a buck of its after hour spike. Oracle duplicated that gain with a +1.19 close.

Take Two Interactive (TTWO) beat the street and also gained a buck but that was an 8% gain for the low dollar stock. The video game maker managed to tack on earnings even without a new version of the Grand Theft Auto title. Their winner for 2010 was the NBA 2011 sports hit.

Accenture (ACN) reported earnings of 81 cents and easily beat street estimates of 75-cents. Their earnings beat was not the big news that powered their stock to an 8% gain. Their new bookings for the quarter were $6.31 billion. CEO William Green said business clients were boosting spending and the business volume from the public sector was not falling as many had expected. He said clients were starting to commit to projects in order to position themselves for an economic recovery. "There is less hesitation than there was previously and there are a lot of things companies want to do."

Accenture Chart

I think we are seeing a solid trend develop. Earnings guidance from RIMM, ORCL, ACN and others has been positive and the comments are growing stronger. Cisco was the only major tech with an earnings problem and after a month of earnings reports from others it appears that problem was strictly related to Cisco and not generic to the tech sector.

Collins Stewart's analyst said, "Enterprise demand is not only holding up well through the year-end, which has been our expectation and prior view, but is actually improving above our expectations." A Stifel Nicholas analyst said, "We believe the Accenture report is another data point validating the recovery of enterprise IT spending."

Everyone will be focused on the holidays starting this weekend but the next cycle for the markets will be the Q4 earnings, which begin in three weeks. Alcoa is the first Dow component to report on January 10th. That may sound like a long way off but it will be here before you know it.

Over the next couple weeks I expect some major companies to preannounce some earnings guidance that will be higher than previously expected. This should set the tone for the earnings cycle and possibly for all of 2011 since conditions are only expected to improve.

There was a lot of talk about commodities last week. Gold is more than $60 off its high. Silver is holding just under $30 as the poor man's gold. Copper is also holding near its highs. The CME is so concerned about speculation in copper and silver they raised the margin requirements for future contracts by 19% at the close on Friday.

We know why gold is going up because it is seen as an inflation hedge and alternate currency among its other uses. Copper and silver are more a pure commodity play on the global recovery. Silver demand is rising in electronics and manufacturing of all types and its gains have been on the back of China's manufacturing boom. Copper has the same fundamentals but also widens out into building and home construction. There are some that feel we could run short of copper in 2011 if the recovery continues to accelerate.

In order to capitalize on this trend there are two new ETFs in the approval process that will hold the physical metal like the GLD ETF holds gold. Unfortunately for those that use copper there is not enough available supplies to have these ETFs gobble up several thousand tons and then sit on it. Copper prices have risen +50% since June as speculators added to positions. One major speculator is a client of JP Morgan. They have bought $1.5 billion in copper in December alone. Analysts believe they are front running the two ETFs currently in the application process. One of those ETFs will be sponsored by JPM. The bank claims it has not bought any copper for its own account but I have a hard time believing they are not related to that single investor in some way.

The JJC ETF is one way for an investor to capitalize on the price move in copper. It is an ETF that holds copper futures instead of actual copper ingots. I would probably look at one of the physical metal ETFs when they are approved but we need to give them time to mature once they start trading. If that single investor has cornered the market on copper but the demand from the ETFs is less than he expected then dumping a billion dollars in copper futures is going to put quite a dent in the market. That would be a buying opportunity in my opinion. China is going to continue to grow and India is accelerating right behind China. Actual copper supplies are dwindling because all the good deposits have already been mined. Current ore is far less dense than that mined just a few years ago. I heard two analysts debating the price of copper in 2011 and they said we could see $10,000 a ton or higher, a 25% increase from current levels.

Chart of JJC ETF

Chart of Copper Futures

CRB Commodity Index

AT&T announced on Friday it was buying back 300 million of its shares. This represents 5% of the outstanding shares and roughly $9 billion at today's prices. They also raised their dividend a penny to 43-cents and said capex expectations were in the $19 billion range. Hopefully they will spend a lot of that money on upgrading their network. AT&T shares ended the day flat.

The lawyer suing all of Bernie Madoff's clients recovered $7.2 billion from the estate of insider Jeffrey Picower. The billionaire investor died six months ago from a heart attack. The U.S. Attorney pursuing the case said Picower's wife had agreed to the settlement. This represents every dollar Picower received from the Madoff investment. The SEC, DOJ and NY will receive $2.2 billion of the money and $5 billion will go to investors. The attorney had previously recovered $2.6 billion in other cases and has many billions more in active suits. The $7.2 billion was the largest forfeiture in U.S. history. The Picower Foundation, a charitable organization, was the 71st largest in the U.S. at the time the Madoff scheme was discovered. The foundation was forced to close its doors because its endowment was managed by Madoff.

The trustee believes the amount he can eventually collect could be close to $20 billion. He also believes that is the true amount of everyone's initial investment. The $50-$65 billion commonly quoted includes the payouts and reinvestments for the decade or more the scheme was in place. If he is successful in recovering the entire $20 billion investors could see some of their initial investment returned. Unfortunately for many they received 12% per year on their funds for more than a decade and that money earned over the last six years has to be returned to the trustee in the form of a clawback.

The S&P-500 did its quarterly rebalance after the close on Friday and that helped boost volume to nearly nine billion shares. Stocks added to the index included NetFlix, F5 Networks, Newfield Exploration and Cablevision. Being kicked out for shrinking to the point they were no longer considered eligible for the big cap index were Eastman Kodak, Office Depot and the New York Times. Those companies had shrunk to a market cap of only $1 billion and the companies replacing them had an average market cap of $10 billion.

The market volatility on Friday sank to an eight month low with the VIX dropping to 15.46 intraday. Nobody appears to be worried about buying puts to protect positions so premium values are declining sharply. Those shrinking premiums negatively impact the VIX. This was also a quadruple witching cycle, which should have had increased volatility so the lack of it was surprising.

You don't need the VIX to tell you there is no volatility. The Dow has gone for eleven days without a 100-point range. Since November 30th the Dow is up +6% and most of that came in the first two days of the month. You have to go back to 1996 to find a longer streak of narrow range days. The Nasdaq and S&P have been down only two days in December.

The AAII Investor Sentiment survey for the week ended on Wednesday showed 50.2% of investors were bullish compared to 27.1% bearish. The bullish number declined -2.8% from the prior week but the bearish investors spiked nearly +5 points from 22.56.

Sentiment is running very bullish and for good reasons but bullish numbers over 50% typically indicate overconfidence and potential trouble ahead. The VIX at 15 is also a warning sign.

However, sometimes there are good reasons for investors to be bullish and the VIX can remain low for a long time before disaster strikes. Back in April the VIX hovered around 15 for nearly a month before spiking to 48 in mid May.

When the fundamental outlook for stocks is positive and improving daily the technical indicators tend to be less important. There are still days or weeks where the markets can move lower but the long-term direction remains higher. I believe that is where we are today.

I am becoming concerned we could see a decent dip in early January but I think it will be from funds shuffling their portfolios rather than a change in sentiment. If a fund bought Apple at the $82 lows in 2009 they eventually have to sell it in order to capture that $240 profit. They will either do this in October for their fiscal year-end or in January. Taking profits in January allows them to invest those profits with an entire year ahead of them before having to deal with bonuses and taxes again. For a stock like Apple they have to wonder how much higher it could go. Is holding out for $350 worth risking the $240 in gains they already have? Do they have any better stocks they would like to own? Lots of funds will be asking themselves those questions and dealing with the answers in January. In reality most have probably already made the decisions and they are just waiting for January to put them into action.

If the markets remain positive and they are seeing positive flows into funds they may hold their positions to see if they can get a bounce on earnings. In years when conditions for an earnings rally are right the January decline is normally postponed until mid February.

Rarely does this happen. Only once in the last ten years has the early year high been in February. In every year there was a decent decline early in the year. In 2005-2006 those declines were early and shallow but this is a factor of the market at the end of the year as well. If the last couple months/weeks were down then the January damage could be minimal while strong Q4 gains could lead to more profit taking. There is no perfect formula.

S&P-500 January High Table

The most likely scenario would be a repeat of the 2004-2005 transition. The S&P gained +15% from August 2004 to end the year at 1,217. The January decline started the first trading day of 2005 and lasted for three weeks but the damage was minimal with a loss of 54 points. In 2010 the S&P has gained +19.6% since the end of August and could very easily be setting up for an early January decline. If it does happen I don't expect a disaster but only a decent bout of profit taking that allows funds to shuffle their portfolios for what should be a good year in 2011.

SPX 2004-2005

For instance we have seen a very strong rally out of the August lows but we had a decent bout of profit taking in November. That could mean the funds rotated positions in November and we will only see a minimal dose of profit capture in January. In fact the entire May through August period was pretty volatile and could have forced that portfolio reallocation.

Regardless of what we may experience in January I think the rest of this year could be tame. Once into 2011 we need to protect any profits and be prepared to buy any January dip. The economy is recovering. Businesses are starting to spend money and the next year should produce decent gains in the market. We need to put aside our macroeconomic views (country, economy, GDP, etc) and focus on the microeconomics of individual companies. (Earnings, revenue, market share, etc)

The Fed is in control of the macroeconomics. They will continue pouring money into QE2 and other stimulus to insure a recovery. If history is any indicator they will eventually succeed in creating hyperinflation but that is another problem for 2012. In the short term they will be forcing positive growth in 2011.

Our job will be to invest into those companies that are capitalizing on the business cycle by investing and growing their businesses and expanding profits and their stock price.

If we spend all of our efforts worrying about the next market crash we will not be able to successfully profit from the individual companies growing their businesses. 2011 should be a stock pickers market. I plan on picking some winners and I hope you will as well.

On Friday the markets were lackluster despite the approval of the tax compromise. That was already priced in and traders were more focused on leaving early to hit the malls than watching charts. The S&P closed up one point. A golf clap please!

The range on the S&P was a measly five points and it was a quadruple witching Friday. That gives you some idea on how boring it was to watch. None of the support and resistance levels changed or were even tested. Support is 1235 and resistance 1250. However, the boys have maneuvered the S&P to within 6 points of the most predicted year-end closing level on the S&P at 1250. They are really close to adding that accomplishment to their resume for 2010. It will be interesting to see if they can hold the S&P at this level for the next nine days.

S&P-500 Chart

The Dow really needs a positive news event and soon. For a week now the index has wandered in a narrow range with traders showing an obvious lack of interest. If it was any other week of the year I would be seriously worried about an impending crash. However, with fundamentals improving and holiday sentiment normally bullish they may be able to keep it hanging here for another few days. If we could get a news event like a couple strong guidance upgrades, a major acquisition or some resolution in Europe we might be able to manage a short squeeze to a new high.

I am not holding out much hope and I will be very happy just to see it hold in the range until the end of December. Initial support is 11,445 followed by 11,335. Resistance is 11,500.

Dow Chart

The Nasdaq managed to punch through the short-term downtrend resistance (red line) but was immediately repelled after making a new three-year high at 2650. Apple, Google and NetFlix were all negative for the day and exerting a significant drag on the index. The breakout was only slightly bullish because it was slapped back so quickly.

With the lack of material volume and general lack of interest by traders ahead of the holiday we should be grateful for any gain at all but I was disappointed. Support is now 2640 and resistance 2650. That is a very narrow range.

Nasdaq Chart

The Russell is no help this weekend. The index did close positive but right at new resistance at 780. As I stare at the chart through my rose colored glasses I am imagining a breakout next week. Whether that will come true is of course is the $64 question.

Since most funds shut down for the year on Friday, except for a token crew to mind the store, I seriously wonder how much more additional buying we could see. I believe it will be up to the retail investor and I am not sure they are really on board. I think they are waiting in line for a parking spot at the mall instead of watching resistance levels.

"IF" the Russell can breakout next week the positive sentiment should drag the big cap indexes along for the ride. Support is 770, resistance 780.

Back on December 9th I pointed out the late day range squeeze as a potential breakout the following day. The intraday spike followed by the minimal range is evidence of buyers and sellers meeting on the field of battle and buyers pressing resistance. On the 10th we got the breakout and it was very strong as shorts were forced to cover. On Friday we saw an almost identical signal. There was a spike in the middle of the day followed by a hard stop right at resistance but the buyers were not repelled. They remained locked in battle and closed right below the high for the day. If conditions play out as they did last time and there is no geopolitical news over the weekend we could have a move higher on Monday.

Russell Chart

In summary, I would like to see the markets continue to creep slowly higher because eventually a short squeeze would be triggered. The Nasdaq attempted a jailbreak on Friday but was knocked back for a minimal gain. However, we can't apply too much importance to any of the indexes on Friday because of the low volume and lack of interest by traders.

While bullish sentiment may be over 50% in survey terms it is not translating into market gains. Unless something happens to get traders fired up over the holidays I fear it is going to be a boring two weeks. This is normally a bullish period but the bulls are nowhere to be seen.

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Don't fight the Fed!

Jim Brown