For the first time in four years the Friday after Thanksgiving was positive and solidly in the black. Any bets on next week?

Market Statistics

The Dow rallied +421 points for the week and easily went from heavily oversold to extremely overbought in only four trading days. Friday was the first positive Black Friday since 2008. It was also the first five day gain for the Nasdaq in more than five months. Friday's volume of only 2.8 billion shares was also the lowest for Friday since 2007. So what prompted this rally?

First, the markets were oversold. After two weeks of strong selling that knocked the Nasdaq back into correction territory and -1000 points off the Dow we were simply due for a rebound. Thanksgiving week is normally bullish and the combination of a bullish week and oversold conditions was a match made in heaven.

Also helping was the ceasefire in Gaza, the expectations for a deal to be done in Greece and suddenly improving economics out of China.

I warned last weekend to expect a trading bounce that would likely fade the week after Thanksgiving. We got the bounce now it is time to watch for the fade.

What we did not have last week was a steady lineup of lawmakers stepping in front of a microphone to state their party's position and berate the other party for attempting to bring down the American political system.

The political headlines should return next week. Lawmakers will be back from their holiday break and each party will begin to lay out their talking points in the press with trial balloons to try and gauge public acceptance of their positions.

To use Art Cashin's description of prior week's meeting at the White House, "there were no black eyes at the press conference" so investors took that as a positive sign of imminent cooperation. However, I believe it was simply a scripted appearance in order to pull the markets back from the brink. The fighting is still to come and it will not be pretty.

We may not see the positioning begin on Monday but it will appear in the days ahead. I personally do not believe the cliff will occur. I believe they will apply the appropriate Band Aids and kick various parts of the cliff farther out into 2013 where they can then deal with each piece on its own and without significant market risk. Granted they may not elect to apply the Band Aids until the last minute because that is when most legislation gets done. That means December could still be rocky for the markets.

On the positive side the economics have been improving slightly. New residential construction rose from 872,000 to 894,000 units for October and well over the consensus for 830,000 units. Existing home sales rose from 4.75 million to 4.79 million. The NAHB Housing Market Index spiked from 41.0 to 46.0 and the highest level since May 2006. That is an increase of +27 points in just the last year. Single family homes accounted for 8 of those points this month alone.

Consumer sentiment was revised down slightly from the initial November reading of 84.9 to 82.7 but that is still a multiyear high.

Gasoline prices are declining sharply with a 50 cent decrease from the September levels. They have ticked up slightly over the last two weeks on the violence in the Middle East but that should begin to fade next week.

The U.S. economic picture faces an uphill battle next week. There are five reports on the health of the manufacturing sector and one of those is the Fed Beige Book reporting on all 12 Fed districts. In theory they should show improvement or at the very least no change in the status quo.

The Q3 GDP revision on Thursday is expected to show a drop to +1.8% growth from the initial 2.01% reading. That is not expected to cause any market volatility because they will blame it on Hurricane Sandy.

Economic Calendar

The biggest report for the month will be the Nonfarm Payrolls on December 7th. Hundreds of companies have announced layoffs as the result of the election and the now guaranteed arrival of Obamacare. Companies are cutting staff to either get under the 50 employee minimum or cutting staff to reduce the increase in costs that Obamacare brings. The rash of job cut announcements immediately after the election may not be fully captured in the Dec-7th payroll report and they could also be hidden by the upsurge in holiday hiring. However, that report will still be a key data point for the December market.

The big economic lift for last week was the flash PMI for China. China's manufacturing sector saw growth rise to a 13-month high at 50.4 for November according to HSBC. A sub-index measuring output rose to 51.3 and the highest since October 2011. This is the preliminary reading with the final reading due out on Dec 1st.

A flurry of pro-growth economic policies have been implemented over the last year ahead of the change over in leadership in China. These policies appear to be working and numerous analysts have now dropped the hard landing concerns in favor of slow but steady growth from China in 2013. Momentum is increasing and by January we could see that growth accelerate and that will power market sentiment around the world.

On the negative side of the ledger the new Islamist President of Egypt unilaterally decreed himself greater powers. He declared the presidency and the Islamist led assembly, working on a new constitution, the immunity from court orders. The courts are barred by his new decree from challenging his decisions and those of the assembly.

His decree gave him the power to take "due measures and steps" to deal with any "threat" to the revolution, national unity and safety or anything that obstructs the work of state institutions. He decreed that all decisions he has made since taking office cannot be appealed in court or by any other authority. The courts had been looking into ways to halt the assembly working on the constitution because of radical points they had already slated for inclusion. That assembly is no longer reachable by the courts.

The opposition party leader said "Morsi today usurped all state powers and appointed himself Egypt's new pharaoh. This is a major blow to the revolution that could have dire consequences." The opposition called for mass protests this weekend to force Morsi to rescind his decree and be accountable to the people and the courts. Thousands of demonstrators gathered in Tahrir Square and other locations and the protests quickly turned violent. Hundreds of protestors were injured and the crowds were growing all across Egypt.

The worries about another revolution in Egypt pushed crude prices higher on Friday due to fears of escalating violence over the weekend. Gold prices also rose on worries over the Middle East tensions but also on a sharp drop in the dollar. The expectations for a final deal on Greek aid buoyed the euro.

Gold Chart

Dollar Index Chart

Worries over the European economy also weighed on the markets. The Markit flash PMI for Europe fell to 45.7 and the lowest level since July 2009. Expectations were for a hold at October's reading of 46.0. The European PMI has now been below 50 for ten consecutive months. The German economy appears to be weakening further and a weak Germany means the rest of the EU countries will be even weaker. Strong industrial production data for July and August helped support the summer months but that strength is slowly deteriorating. The manufacturing PMI had edged up to 46.2 from 45.4 but pessimism over Q4 is growing.

Unfortunately the summit of the 27 European leaders last week failed to agree on a long-term spending and broke up on Friday without a budget. There was a strong contingent that wanted to increase spending to provide stimulus but they were offset by several countries that wanted to cut spending to reduce budget costs and improve fiscal policy. EU president Herman Van Rompuy said the discussions were constructive and the countries might reach an agreement early next year. The budget is expected to be around $1.25 trillion for the 27 countries. Under EU laws all 27 countries have to agree. Any one country can veto the entire plan. It should be noted that France saw its AAA credit rating cut by Moody's earlier in the week. As the EU puts more funding demands on the member countries we will see further ratings cuts.

The lack of a budget agreement came just five days after the 17 Finance Ministers for the eurozone failed to reach an agreement on Greece. As in the budget dispute any one country can veto any deal on Greece. A new try on reaching a deal on Greece will be held next week. If they give Greece the last tranche of $41 billion and extend the repayments for another 2 years the market should rally at least temporarily. The eurozone has no other choice other than writing off the 340 billion in debt and allowing Greece to leave the euro. All of these last minute demands are simply political theater designed to pacify the population of the countries funding the Greek debt.

The only stock making news on Friday was Research in Motion (RIMM). National Bank Financial raised their target price from $12 to $15 and reiterated an outperform rating. The company said the release of the BlackBerry 10 OS and two new handsets on Jan 30th should raise RIMM's subscriber count and improve their cash position. The company raised its estimate for devices sold in 2013 from 31.6 million to 35.5 million. NBF expects the subscriber base to decline 4.0 million to 74 million but gave RIMM credit for maintaining the majority of its subscribers. NBF also said the average selling price could rise from $260 to $280 for Q2-2013. That is substantially above the $210 estimate for the current quarter. RIMM shares rallied +14% on the upgrade on what was clearly some massive short covering.

RIMM Chart

Black Friday in the U.S. turned in mixed reviews. American Express predicted shoppers would spend 25% less than in 2011. That was due to an early start to the season with 43% of consumers starting their holiday shopping well in advance of Black Friday.

However, IBM, which manages the cash registers in thousands of stores, said late Friday that consumers were actually spending 18% more than they did in 2011.

The real truth will not be known until the November are reported later in December.

For the next five weeks investors will be betting on Congress instead of stocks. We are going to be reading the daily headlines and discounting the potential for the most pessimistic events to come true.

The potential for the country to go over the fiscal cliff is very low.

The potential for Congress to kick the can down the road is very high.

The potential for market volatility is about 100%.

Unfortunately navigating the headlines is the price we will have to pay for the eventual market rally once a perceived deal is completed.

The odds are about zero that both parties will announce a compromise over the next couple weeks while we all know there will be microphone appearances claiming they have a mandate to uphold and therefore voters should call the leaders on the other side and tell them to compromise. You see, compromise in politics is highly desirable but only when it comes from the other party.

The S&P dipped to 1343 the prior Friday and then rebounded to close at 1408 this Friday. On Friday alone the S&P added +18 points on absolutely no news. This was a short squeeze week and nothing else.

The S&P did rebound over the 200-day average at 1383 and the 100-day at 1406. Those levels will now be support when the fiscal cliff headlines return next week. However, at this point I believe the Q4 lows are behind us unless the headlines become exceptionally ugly. Everyone is starting to believe that Congress and the president will not want to cause another market crash and will take the escapist way out by use of the Band Aid approach and skillfully kicking the problem farther down the road. Without the fear we will actually go over the cliff the next assumption is that the market will rebound on the solution.

If the bottom is behind us and there is a rally in our future then future dips should be minimal and used as buying opportunities. Of course that assumes a rational debate over the cliff solutions and a rational market. I am not sure we can count on either one of those assumptions.

I would look at the 200-day at 1383 as being decent support on any future dips and then we will see how confident traders are that the bottom is actually behind us.

S&P Chart

The Dow tested support at 12,500 on two consecutive days and support held. The resulting rebound of +500 points makes is unlikely we will return to that level and even more unlikely we will break below 12,500 as I had previously expected. Market sentiment has changed from expecting the worse to expecting a resolution.

The Dow has strong resistance at 13,279 and that is the next material pause point if the upward move continues.

Dow Chart

Apple rallied +66 from the Nov 16th low at $505. After five weeks of persistent declines the Apple rebound helped power the Nasdaq to its best gain in five months. Apple earnings should be outstanding for Q4 and that suggests the Apple gains are not over. One sales report I saw on Friday had three iPads being sold in Best Buy for every one Android tablet. That may have been a true trend or it may have been just a one day fluke but either way iPads are being sold in quantity and the delivery time frame continues to shrink as Apple catches up with prior device shortages.

The Nasdaq has significant resistance at 3,000 and could touch that level early next week if traders return in volume. The restart after Black Friday typically takes a couple days so Wednesday will be the key day. Support is now 2900.

Apple Chart

Nasdaq Chart

Nobody knows which way the market is going on any given day. With that being said I think we are moving into buy the dip mode as opposed to sell the rallies. I suggested last week that we would see a rally over the holiday week and that weakness would return next week. I still believe that weakness will appear once the fiscal cliff headlines return. That will probably occur later in the week.

However, volume last week was extremely low with Black Friday volume the lowest in five years. Beware major market moves on low volume. They tend to reverse when volume reappears.

I would look to tighten up stop losses on long positions and be prepared to buy any dips back to the 200-day average (1383) on the S&P-500.

The term Santa Claus rally is already starting to appear in the headlines. There is good reason behind the mention because December is well known for being a bullish month. Since 1999 the S&P has risen an average of 2.26% in the month of December. That breaks down to 1.56% before Christmas and +0.7% after Christmas. Actually that after Christmas gain is condensed into the last three trading days of the year when the S&P averages a +0.96% gain. This year there are only three trading days after Christmas if you don't count Monday, which is New Years Eve. Having New Years Eve fall on a Monday is a perfect recipe for a four day weekend and that means volume on Dec-31st will be even lower than normal for a New Years Eve. They might as well have closed the market but Monday is a full trading day.

The Santa Clause rally phenomenon is thought to be the result of consumers being in a happy mood ahead of the holidays. That has been debunked numerous times but the rumor persists. I believe it is the result of people investing their holiday bonus checks. Most companies give out bonuses between Thanksgiving and Christmas and some of these bonus checks are quite large. After allocating funds for gifts and holiday expenses some of the remaining cash goes into the market. That gives us the pre Christmas gains. After Christmas the bounce comes from mutual funds putting excess cash into winning stocks to dress up their yearend portfolios. That causes the stronger yearend bounce because the winners are already leading the market and that cash infusion drives them higher.

If you want to capture the December gains the S&P is not the place to invest your money. Neither is the QQQ. The biggest winner is normally the Russell 2000. The Russell ETF (IWM) averages a +4.01% gain over the last 13 years. The S&P (SPY) +2.26, Nasdaq 100 (QQQ) +2.21% and Dow (DIA) +2.48%.

I doubt this December will be a typical December and the Santa Rally will most likely be absent because of the fiscal cliff worries. However, the instant it appears the cliff has been flattened or at least kicked into 2013 the resulting rally is likely to be well in excess of the historical December gains. The only question is when the fiscal cliff will be flattened.

This commentary was shorter than normal because absolutely nothing happened that was newsworthy over the last several days other than what I reported above. The news outlets were overflowing with Black Friday news that pushed the cliff headlines off the board just like I warned last weekend. After the Friday spending recap on Monday the news outlets will move back to the fiscal cliff news so be prepared.

Definitely, enter passively and exit aggressively over the next few weeks!

Jim Brown

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Saying "I will be greedy when others are fearful" is much easier than actually doing it.