The U.S. stock market managed to post a gain for the week in spite of the ongoing battle in Washington over how to handle the fast approaching fiscal cliff. That was the week in one sentence. A steady stream of headlines out of Washington about press conferences without any actual progress failed to stop a rally in equities although the market started to stumble late in the week. When the republicans saw that the president was not going to compromise Mr. Boehner announced they would go through with their "Plan B" tax legislation. Yet the Speak of the House was unable to generate enough support for the bill and pulled the vote. This sparked the market's sell-off on Friday morning and would seem to put the republicans in a weaker position heading into the final days of 2012.
We had a lot of economic data this past week and most of it was mixed. There were three regional fed surveys. The New York Empire State manufacturing survey fell from -5.2 to -8.1, which was worse than expected. The Kansas fed survey rallied from -6.0 to -2.0. The Philadelphia fed survey reversed from -10.7 a month ago to +8.1 in December.
Elsewhere the NAHB housing market index improved from 45 to hit 47 in December. The existing home sales for November came in at an annual pace of 5.04 million, which was up from the prior month's 4.76 million. The weekly initial jobless claims came in at 361,000, which was slightly worse than expected.
The final reading on consumer sentiment in December was a disappointment with a drop from 74.5 to 72.9. This is the lowest level since July and down nearly 10 points from November's 82.7. Falling consumer sentiment numbers could spell trouble for the strength of holiday shopping and might portend trouble for Q4 earnings among the retailers.
Two of the bigger economic reports for the week were the durable goods number and the third estimate on the U.S. Q3 GDP growth. The headline number for durable goods orders in November fell from +1.1% the prior month to +0.7%. That was still better than economists were expecting. If you exclude the more volatile transportation numbers then the durable goods ex-transportation was +1.6%, which is down from the +1.9% the prior month but still way better than expected. Meanwhile the third estimate on Q3 GDP rose to +3.1%. That's up from the prior estimate of +2.7% and significantly better than the +1.25% growth we saw in the second quarter. Fueling this growth was a big +3.9% jump in consumer spending, a +1.9% jump in exports, and +1.6% growth in consumer spending.
The S&P 500 index managed a +1.1% gain for the week. Yet the rally stalled at 1445 and Friday saw the index testing support near 1420. If the 1420 level fails the S&P 500 index would likely see a quick drop toward round-number support at the 1400 level. Below that is likely support near 1380.
Should stocks start showing strength again then a rally past 1450 could signal a move toward the 2012 highs near 1470.
chart of the S&P 500 index:
The NASDAQ composite struggled with resistance near the 3,050 level midweek. The selling pressure on Friday pulled the index back toward round-number support at 3,000. The index still managed a +1.6% gain for the week. As you can see on the chart below the overall pattern is still a bullish one of higher highs and higher lows. If the NASDAQ breaks support at 3,000 then 2950 is the next support level followed by 2900.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index ($RUT) looks the most bullish. The $RUT posted strong gains for the week (+2.9%) and only minor profit taking on Friday. Seasonally the December-January period is a bullish one for small caps and they were definitely showing relative strength last week. On the chart below you can see the positive trend of higher lows. The $RUT is also nearing major resistance at its all-time highs in the 870 area. A breakout past 870 would be very bullish for the market. Until then the 870 level should be seen as overhead resistance.
chart of the Russell 2000 index
The economic calendar this week is pretty light. The U.S. markets will close early on Christmas Eve (Monday) around 1:00 p.m. ET. The markets will be closed on Dec. 25th for the Christmas holiday. When the markets reopen on Wednesday the focus will be on the fiscal cliff negotiations and not any economic data.
Economic and Event Calendar
- Monday, December 24 -
U.S. markets close early for Christmas eve.
- Tuesday, December 25 -
U.S. markets are closed for Christmas
- Wednesday, December 26 -
Case-Shiller 20-city home price index
- Thursday, December 27 -
Weekly Initial Jobless Claims
new home sales
- Friday, December 28 -
pending home sales
Additional Events to be aware of:
Jan 1st, 2013 - U.S. markets closed for New Year's Day
Jan 10th, 2013 - ECB interest rate decision
The Week Ahead:
Looking ahead the week in front of us is going to be a short one. Most market participants will be on vacation and hopefully focused on their friends and family and not Washington. However, the market itself will be glued to each and every little headline regarding the fiscal cliff negotiations. The media spotlight will intensify with only Wednesday, Thursday and Friday to get a deal done. This down to the last minute game of chicken between republicans and democrats could spark additional volatility in equities. In all likelihood we could be going over the cliff. That could spell trouble for the first week of January.
While Speaker of the House Boehner was embarrassed with the lack of support for the "Plan B" vote on Friday the republicans still have leverage against the White House. The U.S. debt ceiling will be hit again some time in February. If the president wants any cooperation on the debt ceiling then he may have to compromise on the fiscal cliff.
One thing is certain. Trading volumes this week should be very, very low. Most of the end-of-year and end-of-quarter window dressing should have been done already. That may have been what kept stocks in positive territory this past week. Low volumes can allow for exaggerated movement in individual stocks. If you're going to trade, then trade carefully.
I want to wish a very merry Christmas and happy holidays to all of our readers. Stay safe and take time to appreciate all of the blessings in your life.