The Dow traded on both ends of its recent range to make four consecutive weeks of round trips from top to bottom. The quadruple witching produced volume of more than 11.3 billion shares on Friday but no real market gains.

Market Statistics

There is more red and green in the market stats graphic above than I have on our Christmas tree. The last couple of weeks have been full of volatility but no real market gains. The closer we get to year-end without an apparent direction the more I become concerned about the first week of January.

There were no economic reports of note on Friday. The Regional and State Employment showed that the unemployment rate fell in most states as seasonal hiring put people back to work. 36 states reported a smaller unemployment rate. Only eight states reported a higher unemployment rate. Employment increased in 19 states. Michigan still has the highest unemployment rate at 14.7% but that actually improved slightly from 15.1% in October.

On the surface these numbers would appear positive but falling unemployment does not always mean more people went back to work. The unemployment rate falls when people exhaust their unemployment benefits and fall off the state list. They are still unemployed but are no longer counted.

The calendar for next week only has a couple of reports of interest but I seriously doubt anyone will be paying attention. Monday has the Chicago Fed National Activity Index and Tuesday the Richmond Fed Manufacturing Survey. Normally those would be of average interest but I suspect next week they will be ignored.

The Q3-GDP on Tuesday is just another revision and no major changes are expected. That revision probably has the biggest opportunity for a market surprise simply because nobody is expecting a major change. Everything else is filler on a week that few traders will be at work.

Economic Calendar

Friday was a quadruple witching expiration with options and futures expiring. It is called quadruple witching because stock index futures, stock index options, stock options and single stock futures expire. There are four quadruple witching Fridays per year at the end of each quarter.

The quad witch produces strong volume as traders square their positions going into expiration. Time has run out and everybody has to pay the piper or be paid by the piper if they are fortunate enough to be on the winning side of the trade.

S&P takes advantage of the increased volume to rebalance their indexes once per quarter. With all the new stock being issued over the past several weeks there were some monster changes in individual stocks. Citigroup priced a huge secondary offering earlier this week and the new S&P weighting forced index fund managers to add $2 billion in exposure to Citigroup at Friday's close. Citi traded over 2.147 billion shares. When your stock is trading at $3.20 it takes a lot of volume to equal $2 billion.

Wells Fargo (WFC) was another stock managers had to buy along with Lennar (LEN), Freeport McMoran (FCX) and Priceline (PCLN). Stocks that were weighted lower due to buybacks and other events included Travelers (TRV), WellPoint (WLP) and ExxonMobil (XOM). Those stocks saw selling at the close.

Visa was added to the S&P at the close and had been on a vertical ramp all week. Nearly $4.3 billion in Visa shares had to be bought at the close. Visa hit $89.69 intraday after last Friday's close at $81.34. S&P announced the addition of Visa after last Friday's close.

The volume rose all week to top 11 billion shares on Friday. That is the strongest volume day since October 30th when the Dow dropped -250 points. Other than Monday I doubt we will see 8 billion on Tuesday and we could be under 7 billion the rest of the week. After Monday's expiration clean up day there will be nobody at the trading desks for the rest of the week. With Christmas on Friday everyone will be heading to the malls or traveling to mom's house after option settlements on Monday.

Market Internals Table

Big movers in the market on Friday included Research in Motion (RIMM), which rallied +10% on their outstanding earnings news. I wrote about this last week regarding the expected post earnings volatility. The volatility was right on target and they beat as I expected. Quite a few analysts were pounding the table on Friday to sell/short RIMM on the bounce because they think the iPhone and the Google Android are going to be even stiffer competition in 2010.

One of the bulls was an analyst at Deutsche Bank who upgraded RIMM to a "hold" after their earnings. He really went out on a limb with that upgrade. I don't understand this with earnings for the quarter up +59% and revenue up +41%. International growth was +38%. RIMM also raised their Q4 forecast to $1.23 to $1.31 on revenue of $4.3 billion. Analysts were expecting $1.12 and revenue of $4.1 billion. A Bank America analyst got it right and said, "We believe consensus estimates fundamentally under-appreciates RIM's messaging as a killer-app differentiator for smartphone adoption."

RIMM shipped 10.1 million Blackberries during the quarter and added 4.4 million new subscribers. Analysts were expecting 9.5 million phones sold and 4.1 million new subscribers. I would remain a buyer of RIMM on a January pullback.

Chart of Research In Motion

Palm (PALM) was the black sheep of the Thursday earnings list and lost -13% in Friday's trading. I was worried that Palm might disappoint and that is why we executed our profitable long in Option Writer on Wednesday.

Palm posted a loss of -54 cents for the quarter compared to analyst estimates for a loss of -32 cents. A -29% decline in Palm smart phone sales suggests there is trouble ahead. The Motorola Android is rapidly gaining in popularity and while it has not yet eroded Apple's lead it is definitely pushing everyone else but RIMM to the sidelines. Palm was a clear result of that growing Android market share. RIMM was unconcerned. Android who? It appears Blackberry buyers are not being swayed by the Droid marketing but Palm prospects are definitely being seduced away.

The next big splash in the smartphone pond will be a Verizon powered iPhone and analysts expect to see that in 2010. With Verizon's much better 3G network that phone should explode into instant acceptability. When that phone is announced short AT&T.

Chart of Palm

Oracle posted earnings of 39 cents per share compared to analyst estimates of 36 cents the stock rallied $1.46 on the news. That does not sound like much but it was a +6% move and a new 52-week high at $24.34. Revenue rose +4% to $5.9 billion. However, it was not widely reported that excluding the impact of currency exchange rates their overall revenue was flat and software sales would have been down -5%.

The earnings were not the big news. The market moving news had this been other than a quadruple witching day was that Oracle was seeing a sharp improvement in activity. "We are definitely seeing customers back and buying, and it is extremely widespread." On any other day this would have been a major market mover.

Oracle talked more about the SunMicro acquisition than their own results. The president, Safra Catz, is 100% sure they will eventually get approval from the EU and Sun will provide $1.5 billion in new operating income in the first year after the acquisition is closed. Oracle is planning on offering fully featured "high performance" systems loaded with Oracle software. I would probably be a seller of Oracle here but I have a negative bias against the company.

Chart of Oracle

Boeing was flying high on Tuesday after the first flight of the new 787 Dreamliner. But, that was Tuesday. On Friday Ireland's Ryanair ended talks to buy 200 737 planes from Boeing. Ryanair said both parties had reached an agreement on pricing but could not come to terms on delivery dates. Boeing lost a buck on the news and Ryanair gained +6% in the UK. Ryanair said it had planned on offering inexpensively priced "bar stool seating" on some flights.

A spokesman for Teal Group said, "Boeing did the right thing in not selling profitless airplanes for accelerated delivery so Ryanair could sell profitless tickets and undercut the market." By refusing to sell cheap planes Boeing supported other carriers currently paying market rates for fully configured aircraft. If Boeing declines to its 100-day average at $50 I would be a buyer.

Chart of Boeing

What the heck happened to Starbucks? The stock exploded higher on Friday on no news and three times normal volume. Late in the afternoon there was one order to buy for 7 million shares. Option volume was through the roof. Did they find an addictive chemical to put in their coffee that will make us all stop by three times a day for a $5 fix? There is no news to explain the spike. James was long SBUX in Premier Investor.

Chart of Starbucks

What kind of week would it be without volatility in oil prices? After trading down to $68.39 on Monday we saw crude prices hit $74.69 on Friday. Inventories fell for the second consecutive week by -3.7 million barrels and distillates actually fell by -3.0 million barrels. Let's see, a week ago analysts were talking about slowing demand and inventories at Cushing were nearly maxed out. What a difference a week makes when everyone is short.

Cold weather in the North East prompted large declines in heating oil as winter finally arrived. Coincidently natural gas saw the biggest decline in inventory levels of -207 Bcf since last winter. This spike in crude prices has nothing to do with demand. It is simply a short squeeze as the January contract expires on Monday. It was a nice run but the contract is over.

Crude fell to exactly uptrend support and when sellers could not break support there was a rush to the exits. Add in the positive economic news and some geopolitical events and you have an instant rebound.

Yes, geopolitical events have come back into play. Iran is seeking to distract attention from its nuclear deadline at year-end by playing the oil card. According to Iraq, Iranian troops crossed the border and seized an oil well in the al-Fakkah field. Armed soldiers in a 25-vehicle convoy seized the well on Thursday night and ordered the Iraqi workers to leave. They raised the Iranian flag over the well and left the area Friday evening.

Iran is trying to accomplish two things. They are making a statement ahead of the coming Iraq elections. We are always going to be here and your American friends are leaving. Be careful whom you elect. Secondly they are playing the oil card in the current nuclear standoff. By creating an incident over oil they are warning the world that any attack on them could result in an attack on the oil supply lines. They can shut the Straits of Hormuz where 25% of the world's oil travels every day. I know that is a big jump from a one-day occupation of an Iraqi well but it was a carefully played card.

Iran is afraid of an Israel attack and according to second hand intelligence that threat is growing. Iran announced last week it was now making more efficient models of centrifuges that will be in use by 2011. Iran continues to be defiant over the U.N. demand they halt enrichment and said instead they were going to escalate it ten fold. Iran said it now had 6,000 working centrifuges, 2,000 more than previously thought.

Last week Iran also launched a missile test, which Iran says is capable of striking Israel, Europe and U.S. bases in the gulf region. The U.S. State department said Tuesday they are investigating reports that Iran has been working for 4-years on a neutron initiator or trigger for a bomb. Israel's top intelligence chief also said on Tuesday they believe Iran now has enough uranium to build a bomb and is on the brink of a "technological breakthrough" that would enable it to create the weapon.

U.S. Lt. General Patrick O'Reilly said last week that the U.S. was about to test a defensive missile in a simulated Iranian attack on the U.S. It has long been known that Iran wants to launch a nuclear weapon over the USA to create an EMP blast that would instantly destroy all electronics in the U.S. President Obama has given Iran until year-end to halt enrichment or face new tougher U.N. sanctions.

I know that was a lot of facts to list on why oil prices may be headed higher but you can see by the number of events there is a confrontation brewing. Refiners can also see this and they could start to stockpile oil again just in case. If a fighting confrontation did erupt we could see $125 oil again within days. I don't expect it to happen but there are lots of fingers on too many triggers to say it won't happen.

Chart of January Crude Oil Contract

Over the last 12 years I have written well over 1,500 market commentaries in this newsletter. Before 2009 I probably wrote about the dollar less than 50 times. It seems like I have done that more than 50 times in 2009 alone. I do not remember in prior years of the dollar impacting our markets to the extent it does today. I know for most readers they just skip this paragraph just like they do conversations about bonds. However, this year, or at least the last six months, it has controlled our market.

The dollar rally last week was the strongest week in eight months. Fueling the rise was the debt crisis in Dubai and sovereign debt downgrades on Greece, Spain, Italy and Mexico. Analysts believe it will only be a matter of time before the UK loses its AAA rating. Helping fuel the short squeeze was better than expected economic data.

Most analysts believe this is just an end of year adjustment as traders exit their positions before year-end. The "short the dollar, long commodities" trade is very long in the tooth and it appears to be reversing. Gold is struggling to hold the $1,000 level and we saw what happened to crude oil when the dollar spike began.

If this is just an end of year position adjustment then early January could see another reversal. However, every time we get more news about an improving economy we get that much closer to a Fed rate hike and the dollar will begin on a long-term rally when that happens.

It really frustrates me not to be able to trade stocks on fundamentals because of the whipsaw in the dollar. Hopefully we will see an end to this inverse relationship early in 2010.

Chart of the Dollar Index

What are we going to do for excitement next week? Traders and analysts pretty much agree that institutional trading for 2009 is over. It is sit on your hands time in hopes that your current positions hold the current level until year-end. I continue to hear that quite a few funds are heavily into cash in expectations for a buying opportunity from a January decline.

That suggests there is going to be a serious lack of volume over the next eight trading days. What volume we do have as long as the indexes remain over support will be window dressing in hopes of keeping stocks at their current level.

The continued failure at resistance on the Dow is a sign there is no bullish conviction. Traders are buying the dips but they are also shorting the highs. This is not institutional buy and hold and the charts suggest the level that will fail first is support rather than resistance.

With my neck stretched out on the chopping block with that prior statement we have to remember that the last week of the year is typically bullish. Retail investors have their bonus money burning a hole in their pocket and they use time off during the holidays to research stocks and make those buying decisions. The first few days of the new-year have been bullish in the past as end of year IRA and 401K money hits the market.

Last year may not be a great example given the huge decline from September to late November but the end of year was classic. The Dow was range bound for most of December just like we are today. The market started to rally on Christmas Eve but did not find traction until Dec-29th. On the 29th it closed +120 off its lows for the day and rallied through Friday Jan 2nd. The January 2nd close was an 8-week high and the Dow held that level for two days. On the 6th it made a higher high at 9088 intraday and managed a positive close but on the 7th the bottom fell out culminating at 6626 on March 9th.

Nobody expects a repeat of January 2009 but a repeat of those seven days around new years is a definite possibility. End of year window dressing followed by a retirement fund spurt the first couple days of January then a profit taking dip to who knows where? A dip to Dow 10,000 may be all that is necessary for those funds sitting on cash to call it a correction and jump back in. On the mild side if we simply return to resistance at 10,500 before year-end then a return to 10,250 in January may be all that is needed. I tend to believe that won't be enough.

Dow - End of Year 2008

At the risk of repeating myself too many times I believe there are lots of money managers just waiting for the tax year to roll over so they can take profits in a different year. I could be entirely wrong and will be proved right or wrong very soon.

I believe the financial sector is pointing the way. With most banks up +100% to as much as +300% since March there is a lot of profit waiting to be captured. Quick, who is the strongest financial company? Most believe it is Goldman Sachs. They rallied from $47 to $193. Have you noticed their chart lately? They have declined to just over $160 despite every analyst screaming buy. That is a 10% decline already and I believe they could decline to $140 in early January as fund managers take profits.

Chart of Goldman Sachs

It is not just Goldman. Look at the XLF. Everyone but Meredith Whitney believes the banks are in better shape today than in October but the Financial ETF is on the verge of a breakdown. I know there was a lot of dilution over the last month and maybe that is the problem but there is still a lot of uncaptured profits. If the XLF breaks support at $14 it could easily trade to $11.50. That would be a major move in the banking sector.

Chart of the XLF

Let's just say that a short decline in early January is one possibility and keep it on our watch list so we will be ready to buy the dip if it occurs. I don't think anyone believes that the markets will trade down in 2010. I know for a fact that everyone expects strong Q4 earnings in January and a lot of earnings beats. If guidance improves we could be off to the races. Alcoa leads the earnings parade starting on Jan-11th but the real earnings activity does not accelerate until the week of Jan-26th. That gives money managers plenty of time to shuffle portfolios and reload before the earnings cycle kicks into high gear.

Focusing on the Dow, it has made four round trips from 10,260 to 10,500 and back. Friday's low was 10,263. This range bound trading will eventually break and based on the chart the risk is to the downside with a target an initial around 10,000. If we did move higher and succeeded in breaking over 10500 the new target would be in the 10,750 range.

Chart of the Dow

The chart of the S&P is no different from the Dow other than Friday's low did not quite reach support. That was due to Oracle, Apple, Celgene and RIMM boosting the S&P gains. SPX 1085 remains support with a potential dip to 1030 if the January surprise occurs.

Chart of the S&P

The Nasdaq remains at the top end of its range and it was helped by those same big cap techs that kept the S&P afloat on Friday. RIMM, APPL and CELG were the biggest Nasdaq supporters. The Nasdaq has moved from a bullish uptrend to a rising wedge pattern and these normally resolve to the downside rather than break higher.

What news are we going to have in the tech sector over the next two weeks to power techs higher? All the major techs stocks have reported earnings and we are approaching the point where surprise earnings warnings are more likely than surprise guidance upgrades.

I was happy to see the +31 points on Friday and another close over 2200 but the pattern is still bearish until we get a substantial breakout to the upside. Overhead resistance is around 2235 with support at 2175 and 2160.

Chart of the Nasdaq

The Russell managed to stay over support at 606 and closed at 610 on Friday. This is bullish BUT the lack of range is a warning flag. Moving 3-5 points a day is not evidence of strong conviction. However, fund managers appear to be nibbling at small caps and that is not bad. Is it just window dressing until year-end? We won't know until January. Next material resistance is 623.

Chart of the Russell 2000

The NYSE Composite appears to be the weakest index with a declining flag pattern. However, it respected support last week, as well as resistance. The chart still looks heavy to me and without a catalyst I am worried that the NYSE could drift lower and a break below 7000 would be bearish.

NYSE Composite Chart

In summary, I believe volume next week will be minimal but window dressing may keep the indexes in their range until year-end. Once into January I am concerned we could see a sharp but temporary decline. I view this as a buying opportunity if it happens.

There are relatively few news events on the calendar for next week and most professional traders will be gone. Ships can sink in calm seas but it is far less likely. I plan on clearing positions so I am not tied to the computer instead of preparing for family coming in for the holidays. I suspect many readers will have the same plan.

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