The Santa Rally extended gains and helped the market set new all time highs.

Introduction

The markets were fairly quiet this morning while most of the world woke up from its holiday stupor. Asian markets were the most active but ended the day mixed despite the Santa Rally in the U.S. markets. Japan and Hong Kong were both positive while mainland China gave up more than 1% on liquidity fears. European shares were higher but their trading day was shortened and marked by low volume. Low volume was the word of the day in the U.S. markets as well. Futures trading was positive ahead of the economic data and gained slightly after it. The S&P opened about 5 points higher and held those gains throughout the morning. Lunchtime saw the indices flirt with new intraday highs and then again by mid afternoon. The trading day was quiet but moved steadily higher until the end.


The Economic Data

It's been two weeks since the last time I was able to touch base on jobless claims. In that time claims have made a worrisome spike. This weeks claims fell back to lowe levels but there could be more volatility in this number in the coming weeks. It could be that seasonal adjusting is having some affect. Today, initial claims fell by 42,000 from a revised 380,000 to hit 338,000. The four week moving average added just over 4,000 to reach 348,000. The largest declines in new claims come from New York, Pennsylvania and Georgia accounting for a net drop of -40,000 claims. California and Illinois top the list for increases in claims with +4,600 and +3,686 respectively. These two states cited layoffs in manufacturing, retail and service industries. Jobs has been a cornerstone of the recovery and one of the key reasons tapering was begun last week. If the increase in jobless claims is persistnent it could lead the Fed to hold off on tapering next month.


Continuing claims gained 46K from a revised 2.877 million to reach 2.93 million. This is the third week of gains in this figure and the third week since it hit a 5 year low. At this time the figures are still below 3 million but are clearly on the rise. This weeks initial claims could push the continuing claims higher in the next week or two. Today's data is not bad per se but if the levels of unemployment claims keeps rising or if it even just maintains the levels set this week and last week then overall unemployment levels are in danger of rising. It will be two weeks until the next release of NFP and Unemployment data.


Total claims for unemployment fell by 0ver 130,000 to hit 4.279 million. The total claims has spiked along with the initial, today's drop does not bring it back to the low levels seen just two weeks ago. Total claims is still above 4 million and, based on the other two data points, looks like it may stay above 4 million at least for the next week or so. Unless the cause for the spike in the two shorter term data points is not long lasting, or job creation picks up. Of the three, I think total claims is the most important to watch. Seasonal, short term and one-off events that can raise initial and continuing claims don't always come through into this number, making it a better judge of the underlying trend.


Data this week and next week if pretty light. Next week is the end of the month as well as the New Year which means the market will be closed on Wednesday. Data usually released the first Friday of the month, NFP and Unemployment, is being pushed back to the next week. Until then there are a few data points to be on the alert for, including next Thursday's unemployment claims figures.


Story Stocks And The Retail Sector

There was not a lot of news on the wires today. The big headline was the disspointing performance of Federal Express in delivering packages on time. The company was swamped with more than expected traffic and was unable to deliver all as promised. The headline is bad in terms of the holiday, many plans were spoiled because of late or still as yet undelivered packages. However, once you look at the problem from a traders perspective it starts to look like a symptom of good things. The reason why Fed Ex had so much trouble over the past few days is because they received more than expected package volume. A lot more. The company had planned for a certain amount of traffic based on last years figures and this years performance to date. The bad news for them, and perhaps good news for retailers, is that online shopping in the weekend before Christmas increased by 37% over last year. This should become evident in earnings for Fed EX and the online retailers. Today shares of FDX traded at new all time highs. The stock is making a bounce from the short term moving average and recently broken above resistance with high volume. The indicators are bullish at this time and could indicate higher stock prices in the near to short term. Support levels exist just below the current levels at the $140 level, the short term moving average and at $130.


The retail sector has been in the spot light as usual for this time of the year. Depending on where you get your data the sector is doing better or worse than expected. Physical sales at brick-and-mortar stores is down but on line sales are up. Mastercard released a statement this mornings saying that holiday sales were up more than 2% over last year. Post holiday shopping could help to increase that gain. Gift cards are a big segment of the retail sector for the holiday season and the next two weeks are very important because of that. Shoppers are in the malls right now spending those gift cards, in order for the retailers to be able to book those gift card sales before the end of the year the shoppers have to spend it. Factors that could impact post holiday and gift card sales are heavy discounting, returns and exchanges. The XRT Retail Spyder traded to the upside today in continuation of the moving average bounce that began last week with the FOMC taper decision. The indicators are bullish and pointing to higher stock prices. However, there is resistance ahead at the previous high near $89.00. Support is at the moving average and the $85 level. At this time it looks like the XRT will at least test resistance. Whipsaws are possible so a confirmed break is neccesary for a longer term bullish stance.


Fed EX competitor UPS said that they too had experienced higher than expected volume over the holiday week. What they didn't say was that they had any problems. In fact, UPS said it operated at nearly 99% success rate and experienced no delays. UPS actually traded to the downside today. The stock has been trending up and even out pacing the rally in Fed Ex. The indicators are bullish and share prices are near all time highs. Today's news from Fed Ex would have I thought helped to send UPS higher and Fed Ex lower instead of the opposite. Today's price action is likely a combination of the amount of news coverage Fed Ex is getting and light trading volumes.


Amazon, the company responsible for selling a lions share of online merchandise, traded up today. The stock has been able to maintain share prices above $400, a resistance level broken last week after the Fed meeting. This level could be the starting point of a post holiday rally driven by better than expected sales. If the news that online sales in the week prior to Christmas jumped 37% we can assume that Amazons sales also jumped a comparable percent as well. At this time the indicators are bullish. The $400 level will be very important over the next week, if it can hold the stock could keep moving higher, if not first support is likely around $375 with the next likely target around $350.


Gold And The Gold Index

Gold got a boost today. The metal gained about $10 and reclaimed the $1200 handle. Gold prices have been under a lot of pressure lately and could continue to move lower. The taper adds a new dynamic to the trade however. Economic data will continue to drive the Fed's taper decisions, the data and the decisions will drive gold prices along with the dollar and other major world currencies. Before the taper began there were two questions; will the fed taper and if it does, how much? Now the questions have compounded; will the Fed taper the same? Will the Fed taper more, less? If the data weakens, jobs growth slows and unemployment rises will the Fed re-increase QE, Anti-taper if you will. I still don't see a bottom in gold, or a reason to buy in but that doesn't mean it is not there. For now I remain bearish or at least firmly neutral with a bearish bias on this metal. The Gold Index is still drifting lower. The index barely budged during last weeks massive Fed induced rally and does not appear to be gaining in bullish traction. The indicators on the long and short term charts are mixed while shares trade just below the 30 day EMA. Resistance is at the moving average with downside targets at $80, $75 and $65 for a full retracement of the 2008 -2009 bull market in gold.


Oil And The Oil Index

Oil prices traded to the upside today but did not break the $100 level. US WTI ended the day at $99.61, Brent at $111.98. Energy prices are being heavily influenced by expectations and world events at this time. Supply concerns from Libya and South Sudan wrestle with output increases planned by Iraq, Iran and other countries. Saudi Arabia says there is no shortage of demand at the same time more and more production is coming on line, especially in U.S. shale oil deposits in the Marcellus, Bakken and Eagle Ford regions. Meanwhile, Kazakstan's Kashagan Oil Field, one of the largest on Earth, remains closed due to leaking pipeline; there will be no decision on it's reopening for weeks at the least. The Oil Index extended its gains today as well. The index broke above the 1480 resistance again and is heading up to retest the most recent high around 1510. The indicators are bullish and gaining strength on the short term daily charts, on the long term weekly charts they are bullish but in decline. The index is bullish but may have trouble breaking out to new highs. The resistance level of 1510 will be crucial for this trade. If the index is able to break above my first target is 1550. If the index does not break above there are several support levels between the current level and the long term trend line around 1435-1450.


The Yen

The yen extended its losses versus the dollar and most other world currencies. Abenomics and Fed Tapering are pulling the dollar and yen apart and could take the pair to a long term high. Last weeks Fed Taper decision caused the pair to break above the 1.03.75 resistance set last spring and now the pair is moving higher again. The four trading days between the Fed decision and today were a consolidation above resistance now support that was confirmed with todays long white candle. Indicators are bullish in the long and short term, my current targets for this pair exist at 110 and 120. Changes to the taper, QE or Abenomics are risks to this trade.


The VIX

The VIX is trading at long term low levels. Almost approaching pre-financial crisis levels, that low. At this time the market is exibiting little fear, perhaps it finally believes the recovery is really on. However, the low level of fear may be cause to be afraid. I can't help thinking about my uncle's point about the Affordable Care Act. Of course it is good for people to have insurance but the financial burden on families will surely have an impact on spending and the economy. It may be nothing and appear as a blip on the radar but it may be not. For now, the VIX is low and the trend is up.


The Indices

The markets made a slow and steady drive higher today. The S&P 500 and Dow Jones Industrial Average both closed at new record highs. The caveat is that it is the holiday week and volumes are very light. Adding to that is the fact that Christmas was on Wednesday so it is really easy to take Thursday and Friday off for a nice long vacation. However, discounting that, the index is looking rather robust at this time. The index has been moving steadily higher since the Fed decision last Wednesday. Indicators are bullish and gaining strength, pointing to a continuation of the current trend.


Using the SPY ETF as a reference point on volume we can see that volume on Tuesday and today was light, but not excessively so. A little under average today, not too bad. The volume on Wednesday, Thursday and Friday of last week are what is important for me today. The Fed induced rally came with more than double average daily volume for those three days of the week, just before volume fell off for the holiday. I want to point out that the volume spike on the SPY was accompanied by a strong moving average bounce and a strong white candle.


Looking at the chart of the Dow we can see that a similar volume spike occurred in this index last Wednesday. At the same time the index made a long white candle and made a new high. The MACD and stochastic indicators are bullish on this index as well and point to higher prices. The caveat is that there may be some backing and filling over the next week as traders, investors and institutional money comes back to work. I would expect some form of consolidation at the least if not an actual pull back, maybe as far as the 30 day EMA. There is no technical resistance at this time, support targets on a pull back are around 16,200 and 16,000.


The holidays are still upon us and Santa is still driving the bulls to new highs. 2013 was a pretty good year for the stock markets. The S&P, Dow, Russels and others are all at new all time highs while the Nasdaq is making new highs not seen since the DOTCOM days. To put things in perspective the Dow is up about 25% and the S&P about 30%, for the year. This makes an attractive place for taking some profits, if just to book some nice gains. I don't think there will be any massive rush to get out of the market, just the chance that some profit taking may occur before the end of the year.

Looking into 2014 what could the markets bring? At this time the trend is up with no end in sight. The trend could continue but the markets are long overdue for a major correction. A correction could occur but what will cause it? Jobless claims have been elevated, not a lot but enough to give us reason to start speculating the job recovery may have stalled. The impact of the ACA is still an unknown and could also raise fear in the market, however I think the ACA as a catalyst is still a couple of months away. It will take data to move the market in either event. If job growth slows or stops, or if the ACA hurts consumer spending, then the Fed may have to stop or reverse the taper but this is all wild speculation. Regardless of market direction, there will be ample opportunity for savvy options traders to profit. And speaking of the end of the year, the next time I write the Wrap it will be next year.

And I almost forgot that earnings season starts in only two weeks with Alcoa on January 9th!

Until then, remember the trend!

Thomas Hughes

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