Santa came early to the equity markets and he brought a stocking full of coal for the bears.

Market Statistics

The bears are having a hard time digesting the bullish trend in the markets. The rally began to break out of its nearly two weeks of consolidation where every minor uptick to resistance was seen as a bearish entry point for the shorts. Every downtick was seen as confirmation of their expectations. Those expectations were dealt another blow on Tuesday as the indexes eased over recent resistance to new multiyear highs.

The S&P stretched out its gains to close at 1254.64 and over the 1251.78 close on the day before Lehman failed. That is seen as a milestone for the market and one that has been watched closely. Some analysts believed a return to that level would give investors trapped in pre Lehman positions an opportunity to finally exit.

Just because the indexes moved slightly over recent resistance it is not time for the bulls to celebrate just yet. The gains were small and on very low volume. It is confirmation of the trend but without any serious conviction. With the indexes up around 20% since August there are plenty of reasons for a potential temporary decline in January. Until then the bulls will continue to celebrate their good fortune even if the celebrations are low key.

There was only one economic report today and it was strongly positive. The weekly Chain Store sales spiked +1.7% to push year over year growth to +4.2%. This was the strongest weekly gain sin five months. The ICSC said consumer spending appears to be accelerating. The ICSC survey showed 73.9% of holiday shopping had been completed compared to 70.9% in the prior week. However, it was below the 80.1% for this week in the year before the recession.

Despite the strong sales the ICSC is projecting December sales growth between 3.0% and 3.5%. They warn comparisons are turning more difficult and supporting factors like the change in the weather will be gone. Higher gasoline prices are also going to be a drag.

The ICSC is predicting the holiday shopping season overall will exceed expectations. They expressed surprise in the strength of spending given the weakness in the fundamentals like employment and shrinking real estate wealth.

Gasoline prices are hovering at $3.00 per gallon, a level we have not seen since October 2008. Prices are up 40-cents from year ago levels. That is roughly $8 more per 20 gallon fill-up. That $3 price is commonly seen as the tipping point for consumers. Under $3 and they will bite the bullet and continue to drive even though they may complain louder. Over $3 produces sticker shock with that 3 as the first number and consumers begin curtailing driving and cutting back on spending. Quite a few analysts believe the oil shock of 2008 was instrumental in creating the subprime crisis. Financially strapped consumers paying sometimes more than $4 per gallon started falling behind on their mortgage payments and the subprime crisis accelerated.

For the rest of the holiday shortened week there are still a lot of economic reports. The GDP on Wednesday is the most important although there are three housing reports as well. Consumer sentiment on Thursday could generate some market buzz if we see a sharp gain from the prior reading.

Economic Calendar

Making the news on Tuesday was the results of the 2010 census. Our population grew +9.7% since 2000 to 308.7 million. This was the slowest growth for any decade since the 1930s. The largest population growth was in the South followed by the West. Only Michigan and Puerto Rico saw a drop in population. Ten states saw growth of more than 15%. Nevada was the biggest gainer at +35%.

Population rate changes

In stock news Microsoft is rumored to be working on a Windows version to run on ARM chips. The ARM chips are made by Qualcomm, Texas Instruments and Samsung. Most tablets and smartphones run on ARM chips. It is not good news for Intel to have Windows available on other platforms. A Windows version for the ARM chip will allow Windows to run on competing tablets to the iPad and allow consumers to use a familiar interface. Tablet sales in 2011 are expected to be as many as 50 million and a Windows version could capture up to 20% of those sales. Windows tablets are expected to be cheaper than the iPad.

ARMH Chart

On the earnings front Nike reported earnings that rose +22% to 94-cents per share. That easily beat estimates of 88-cents. Revenue rose +10% to $4.8 billion. Unfortunately the company warned they would face some significant challenges to sales and margin. Nike shares were crushed for a $6 loss in after hours trading. Nike Chart

Red Hat shares also took a tumble after they reported earnings that were inline with estimates. Revenue was up +20% but shares were declining sharply in after hours.

Red Hat Chart

Chipmaker Xilinx (XLNX) warned tonight that revenue for the current quarter would fall 7-9% below the prior quarter. Prior forecasts were for a flat quarter to down -4%. Xilinx said sales to large wireless customers were weaker than expected. For the March quarter the company expects to return to sales growth. Shares sold off after the warning.

Xilinx Chart

Adobe was a big winner today with a +6% gain after posting better than expected earnings on Monday night. Adobe posted its first $1 billion quarter. The company said Apple's ban of flash on the iPad was having no impact on Adobe sales. The CEO said the explosion of devices competing with the iPad would push Adobe sales even higher in 2011.

Carnival Corp (CCL) hit a new 52-week high after raising 2011 guidance to between $2.90-$3.10 up from $2.47 in 2010. Analysts were expecting $2.94. The company said booking trends were improving and costs were stable. They are expecting fuel costs to increase but a strong booking season was expected to overcome that increase.

Meredith Whitney was on CNBC this afternoon defending her call on expected municipal bond defaults. Whitney said we could see $100-$150 billion in municipal bond defaults as a result of the decline in federal assistance to the states. State governments are already deep in debt and experiencing some major deficits. When the federal government stimulus handouts end next year Whitney believes the states will have to cut the umbilical cord to cities dependent on them for survival. It is simply not enough money flowing to cover everyone's debts.

Whitney's controversial call has drawn fire from at least a dozen high profile analysts and she is under pressure to support her claims. What I heard was a convincing argument but no real facts. I have had several readers email me over the last week asking what I thought about the potential for defaults. That is not really my market but I understand the points she is making. Unfortunately I think Whitney is trying to make a name for herself now that she has started her own company. It was just a couple months ago she was warning of the next big wave of bank losses and that did not come to pass. I believe she is trying to find a molehill she can turn into a mountain and restore her credibility. Time will tell.

Everywhere I look this week there are positive signs of an accelerating economy. For instance Chrysler announced tonight they were going to keep the Jeep Grand Cherokee manufacturing lines running full speed through year-end because of a backlog in orders. Normally the company shuts down vehicle production between Christmas and New Years. Current sales are so strong they can't afford to fall any further behind in manufacturing. That is a very positive in my view.

A check by one analyst found Wal-Mart to be out of stock online for 76% of the items checked and Amazon was out of stock on 40%. Monday was the last day for online shopping for Christmas delivery. The next round of emails you will get will be plugging the after Christmas sales. I reported earlier chain store sales increased the most in five months last week. You can't get in a mall parking lot and stores have to stay open well after their regular closing hours just to handle the traffic. The pent up demand from the last two years is exploding despite what Best Buy may be saying.

Amazon is on track to sell its eight millionth Kindle this week and Apple will sell its one millionth Apple TV. Tablet PCs are sold out everywhere and that is a high dollar item that did not even exist a year ago. Suddenly everyone has to own one at an average price of $700. That $700 price tag is more than the average family spends on all its holiday giving. It appears to me the consumers have declared an end to the recession despite the high unemployment.

Most consumers don't have the cushy job previously held by Annette Bongiorno. She was Bernie Madoff's secretary and it appears she skimmed off millions of dollars while helping Madoff conceal his ponzi scheme. She was arrested for her part in the scheme but released on $5 million bail. That bail was revoked on Friday after the court found out she had access to millions of dollars in secret accounts and she was deemed a flight risk. She also has multimillion dollar homes in New York and Florida. She worked as Madoff's secretary for 40-years. Her case is a prime example of pressing her gains long after she should have bailed from the company and retired. What secretary can own multiple luxury homes and have a reported $20 million in her private accounts? If she had quit five years ago she could probably have gotten a nice severance package for her silence and moved to Brazil or Monaco and lived very comfortably for the rest of her life. Sounds like she will be retiring to a federal country club but I doubt she will get a mint on her pillow every night.

The markets are their best to irritate the bears. After nearly three weeks of consolidation this slow melt-up is torture for those trying to short the market. Every small tick higher looks like an invitation for a new short entry. For the bulls the slow pace of increases is like a painfully slow striptease. They want to speed up the act but are unable to do so. This leaves both the bulls and the bears frustrated at the lack of conviction.

Everybody better get used to the melt-up because odds are good it will continue. You may not have noticed but the gains today came despite continued bad news from Europe. There were more warnings of debt downgrades on Portugal and Spain and now there are news stories about the problems spreading to even stronger members of the EU community. The market completely ignored the news other than an increase in the value of the dollar. When stocks and commodities both rally over bad news and a strong dollar it is a good sign.

What we are seeing is a good old-fashioned asset allocation move. Money managers are rotating money out of bonds and back into stocks. They have become convinced the bond gains are over and more importantly there is no longer any reason to remain in the safety of bonds. Equities are expected to outperform in 2011 with a 20% to 25% rally if you believe Goldman Sachs and others. Nobody wants to be stuck in a 3% bond if equities are going to gain 20%. Of course those actual gains are a long way from guaranteed but getting better than 3% appears to be a done deal.

The S&P inched slowly higher but the keyword there is "higher." The S&P closed at a new two year high and higher than the close the day before Lehman collapsed. While that is not specifically a technical level it is definitely a psychological level. If we can add to gains from here it should increase conviction by the bulls.

The S&P is pressing uptrend resistance at 1255 but appears close to a breakout leading to a test of stronger resistance at 1270. Any gains from here just add gravy to the analyst predictions back in January of 1250 by year-end. Every point we move higher also drags a few more investors off the sidelines and into the market.

Initial support is now 1250 and target resistance 1270.

S&P Chart

After consolidating at 11,500 for more than a week the Dow managed to move slightly higher to close at levels not seen since September 2008. The intraday range on the Dow has been less than 100 points for the last 13 days. You have to go back to 1996 to see volatility that low. What we are seeing is a compression of the market spring and eventually this compressed volatility is going to explode. The only question will be in which direction?

Support on the Dow is 11,445 and target resistance is around 11,800.

Dow Chart

The Nasdaq chart is an ideal picture of the compressed volatility. On this 60 min chart note how each candle became increasingly shorter as the day progressed to the point where they were just ticks on the chart and no longer candles. This is evidence of two things. The first is a major battle between the bulls and bears but a battle that is being waged on very low volume. Bulls are steadily inching up the bids and the bearish resistance is slowly eroding.

We are seeing something that rarely occurs to this extent. Normally there are big swings as the opposing forces trigger their orders but this time the bears appear unable to pressure prices.

This volatility compression is going to eventually result in a major move. Resistance is 2675 and initial support at 2660.

Nasdaq Chart

The Russell is the strongest indicator we have of the bullish market conditions. Unlike the other indexes the Russell is clearly in breakout mode and this is clear evidence money managers are not afraid of an impending dip. They are no longer waiting for a dip as an entry point. They are buying small caps at new highs. This is very bullish.

Russell Chart

Despite a contingent of bears trying to pick a daily entry point at least one index has closed in positive territory 10 of the last 11 days. The markets are moving up on bad news and in the face of a potential bout of profit taking in early January. While there is no rampaging rally there is solid buying despite a daily dose of bad news from Europe.

I believe we are building up for a major market event in early January. For the rest of this week the trend should continue to be "slow melt-up" rather than a Santa rally. This is a bull market in search for conviction and so far has been unable to find it. There is just the right amount of bearish conversation to keep the pressure on but not enough to do any damage. The bulls, lacking a dip to buy, have to chase prices higher but they are not rushing the process. For those traders not fighting the tape it is has been a happy holiday season so far.

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