The story has not changed with a slow melt up on very low volume and a serious lack of conviction.

Market Statistics

Weak economic reports slowed the market advance and created an undertow of sorts for bulls to overcome. Despite very strong reports about increases in retail spending the Consumer Confidence survey for December declined nearly -2 points to 52.5. Analysts were expecting a sharp gain to 58.3 from last months reading at 54.1. This decline was really unexpected.

There were declines in both internal components. Present conditions fell to 23.5 from 25.4 and the expectations component fell to 71.9 from 73.6. Those who felt jobs were plentiful declined to 3.9% from 4.3%. Those expecting an increase in income fell to 9.9% from 11.1%. Those planning on buying a car fell to 4.5% from 5.6%.

Sentiment remained above its September lows but the sharp drop in all the components is troubling. With a jump in jobless claims expected in two weeks we could see confidence decline again.

Consumer Confidence

This is completely contrary to the very bullish MasterCard Spending Pulse report out this morning. The report said holiday retail sales rose +5.5% for the biggest increase in spending since 2007. Online sales rose +15.4%. The favored categories were apparel and jewelry. Categories that flopped were 3D televisions and an excess of flat screen TVs caused prices to decline sharply. After two years in a consumer recession there was plenty of pent up demand to be released but consumers were very cost conscious. Now that the holidays are over the odds are good consumers are going back into bunker mode and lock up their wallets.

This is especially true due to the impact of $3 gasoline. The average price of gasoline in the U.S. rose to $3.05 on Monday and crude oil is still holding over $90 with analyst targets over $100 for 2011. The $3 level may not produce sticker shock but it will dampen consumer sentiment and spending patterns. Analysts believe a real slowdown in spending will not occur until prices hit $3.50 but we could see that level in 2011.

Another factor weighing on consumers is the rapid declines in home prices since their high last May. The 20-city Case Shiller composite index declined by another -0.8% in October. More recently there have been some other reports suggesting prices could have declined another -3% to -5% in November. As the formal reports are released over the next 60 days it will weigh negatively on consumer sentiment.

Case Shiller Chart (Moody's)

Contradicting the bad news on Consumer Confidence was a very upbeat manufacturing report from the Richmond Fed. The Richmond Fed Manufacturing Survey came in with a headline number of 25.0 compared to the November reading at only 9.0. The new orders index spiked from 10.0 to 29.0 and backorders went from -3 to +14. The average workweek nearly doubled from 9.0 to 15.0 and the employment component rose from 10.0 to 14.0.

This was a very bullish report with the headline number the highest level since May. The uptick in the employment components suggests manufacturers are gaining confidence and are starting to add to staff. This needs to really pickup speed over the year ahead.

We saw consumer spending was improving and that requires replenishment of product inventories to continue. Many retailers sold down inventories significantly because they were afraid to add too much to inventories ahead of the holidays. The surprise spike in retail sales has depleted those inventories and the outlook is good for reorders.

Richmond Fed Chart

There are no reports on Wednesday but Thursday has a long list. The most important is the ISM Chicago as a preview to the national ISM in early January. The EIA Oil Inventory was delayed until Thursday because of the holiday.

Economic Calendar

The quite period following the GM IPO expired today and I am sure nobody was surprised that all seven of the IPO underwriters came out with buy ratings on the stock. The gang of seven, which includes JPM, CS, C, MS, BAC, BCS and RBC Capital Markets, all issued overweight or buy ratings on the stock. Analysts believe the government will sell its remaining stake in GM in 2011. The government needs to sell its shares at $53 to breakeven on its $50 billion bailout investment. GM closed at $35.27 today. The Treasury reduced its stake from 61% to 33% during the initial IPO. For the Treasury to exit without a loss they may have to wait for sometime. Reportedly the government is open to taking a small loss so they can distance themselves from the unpopular bailout well before the next presidential election. That suggests they may try to squeeze an exit out in late 2011. GM traded down over the last month but recent news on auto sales have returned them to the initial prices.

GM Chart

Airlines are heading for a hard landing if the current price trend in crude continues higher as analysts expect. Several airlines raised prices on domestic flights by $10 each way in an effort to compensate for higher fuel prices. Unfortunately this is a losing battle. Back when oil rose to $147 the airlines were killed by ill conceived hedging programs. As a result few carriers are adequately hedged in the current price spike. They are going to need to raise rates even higher and we know from past experience that depresses travel.

Secondly the blizzard forced the cancellation of as many as 7,000 flights and the delays will prove very costly. Many of the delays resulted in cancelled travel plans and fare losses to the carriers. An analyst at Dahlman Rose believes the industry could lose more than $100 million from the cancellations.

With airline earnings in late January a February put position might be a wise investment. United Continental (UAL) closed at a three month low today and odds are good they will miss estimates in January.

United Continental Chart

Copper rallied again on a report suggesting there will be a severe shortage of copper in 2011. One unidentified company owns over 90% of the copper stored in the warehouses of the London Metals Exchange on Dec-22nd. This is the largest position in a couple years according to the exchange. A 90% position would be worth about $3.5 billion at today's price. This position crossed over the 50% threshold in November and is now over 90%. Some analysts believe this stockpile is controlled by JP Morgan in anticipation for their launch of a copper ETF in 2011. JPM has denied they have any ownership but that does not mean someone is not acquiring it for them.

Barclays issued a report last week claiming physical supplies will decline sharply in 2011 because production is not keeping pace with demand. In 2011 demand is expected to exceed production by 825,000 tons and force the consumption of current inventories. The net shortage is expected to be 449,000 tons and that will cause copper prices to rocket higher.

Copper Chart

Commodities have been the big winners in 2010. Palladium is up +92%, cotton +82%, silver +80%, coffee +76%, lumber +53%, copper +29% and gold +28%. As long as China is continuing to grow at a 10% rate and India +9% the demand for hard commodities will grow. Once the recovery accelerates in the developed countries the shortages will become even more acute. This is a symptom of too many people rushing into the new century at a breakneck pace.

Stock news was pretty slim today and volume showed a complete lack in interest in trading. Most trading desks are closed and retail traders are more concerned about exchanging gifts and cashing in gift cards than watching charts all day.

Volume across all exchanges was barely over 4 billion shares. That is half a normal day and only slightly over the 3.6 billion shares traded on Monday. The Monday volume was helped by the blizzard keeping even more traders at home. Volume is only expected to get worse as the week winds down.

Despite the slow volume over the last couple weeks the S&P has managed to post a gain on all buy three days in December. This melt up is going so slowly it is like watching grass grow. We have been at the 1258 level for four days now and we can't seem to break out of the rut.

I mentioned last week I expected a low volatility week with fund managers just trying to hold their gains rather than push the indexes higher. That appears to be exactly what we are seeing. Volume is a weapon of the bulls and apparently they are out of ammunition.

The S&P range for the day was THREE points. That should be a clue as to what the rest of the week will look like unless somebody triggers a big buy program in hopes of creating a year-end short squeeze. Resistance is 1260 and support 1254. This market is wound so tight there is going to be a huge pressure release in January.

S&P-500 Chart

The Dow actually made a new high today thanks to a $1 gain in Chevron. The next biggest mover was 43-cents in Hewlett Packard. If you missed the market today you did not miss anything. Nothing really changed on the chart and the intraday attempt to tag 11,600 failed due to lack of interest.

Resistance other than the round number target at 11,600 is 11,650. Initial support is 11,540. The range was less than 100 points once again and stretching the streak to 17 days.

Dow Chart

The Nasdaq gave up four points on a completely lackluster day for techs. Google was the big loser at -3.46, not really a decent loss considering Google's price. Others included PCLN -3.44, LULU -2.83, STRA -4.82 and RNOW -3.01. A couple of those names you probably never heard before. That is the kind of day it was.

The index finished right in the middle of its recent range and gave no clues as to its future direction. Apple is starting to catch some heat from analysts and they are projecting a decline soon. They are quoting increased competition and narrowing margins. Since Nasdaq is 21% of the NDX and 5% of the Nasdaq Composite any decline in Apple will have serious repercussions for the Nasdaq.

Resistance is 2670, support 2646.

Nasdaq Chart

The Russell was the biggest percentage loser of the major indexes at -0.4% but it was not a big loss. It was twice the percentage of the other indexes and that is troubling even with the miniscule decline. We know that a decline in the small caps will be the leading indicator of a decline in the big caps.

This was not enough today to be anything but noise. However, watch the Russell closely over the next couple days to see if traders are starting to take bearish positions ahead of year-end.

Russell Chart reported today their most recent survey of hedge fund managers show 46% of the 92 managers surveyed are bullish on the S&P. That is up from 31% in November. Those bearish fell from 39% to 19%. Both readings were all time highs and lows. TrimTabs said an "inflationary growth consensus has emerged for 2011. Managers are betting aggressively on the economic recovery." The funds surveyed have assets of $1.8 trillion. The aggregate performance of these funds for 2010 was +5% when the S&P rallied +7.9% including dividends. This suggests bonuses were slim and they will be aggressively long for 2011 given their need to outperform in the coming year and their bullish outlook.

I remain bullish long term but I am growing progressively worried we are going to see a decent dip in early January. Because of those fund outlooks described above I expect the dip to be quickly bought and we will move higher from there. I would be cautious about long positions over the next two weeks and keep those stops tight.

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