Consumers are showing an increase in Christmas cheer this year. The preliminary consumer sentiment numbers for December surged to 73.4 from November's 67.4. The Commerce Department said November's retail sales figures soared +1.3% compared to estimates for +0.6% gain. Yet the market has turned scrooge-like on us and shrugged off this news with a "bah humbug".

The consumer has been the missing ingredient in this economic recovery so it's a mystery why stocks didn't rally further on these improvements. I am sure that a coin counter like Scrooge would happily point out that nearly half of the November retail sales gain was due to an increase in gasoline prices. That's not so good news because every dollar that goes to filling the gas tank is another dollar that doesn't get spent somewhere else. It will be interesting to see what Best Buy (BBY) has to say about the consumer when the company reports earnings this week on Tuesday (Dec. 15th) before the opening bell.

Bigger picture the improvement in business inventories could be a significant turning point. I've been talking about the slide in business inventories for months. The belief has been that one of these days the shelves will get so bare that business will have to restock their inventory and the replenishment phase will add big numbers to our GDP. Well, it looks like that might finally happen. After 13 months in a row the business inventory report actually turned positive. It should be no surprise that China reported a significant surge in their industrial output. Odds are good these are not unrelated events.

The inventory-rebuilding bounce could be so strong that the Federal Reserve might have to raise rates sooner than expected - at least that's the fear. I don't believe it's a very rational fear with unemployment still at 25-year highs. We're starting to hear some economists raise their Q4 GDP estimates to +4 to +5 percent. Just the fear of rising interest rates has helped fuel a massive short squeeze in the U.S. dollar and that's unraveling the commodity trade. You could argue this is just a sharp oversold bounce (bear market-rally?) in the dollar but short-term the trend is up for the currency. All eyes will be fixed on the FOMC meeting this week, which concludes on Wednesday. Ben Bernanke's comments on the economy and monetary policy will set the tone for the rest of 2009.

A week ago we were reacting to the -11,000 jobs report. In addition to an improving labor market we can add improving consumer sentiment, sales, and output. Plus, for the first time in a long time, the dollar rallied and stocks didn't tank lower on the move. Yes, it certainly seems like conditions are improving. It's all part of my forecast for two or three quarters of positive GDP growth before we fall back into the W-shaped recession. On a short-term basis I remain cautiously optimistic but I think I was cautiously optimistic last week. So maybe I'm a little bit more cautious or a little bit less optimistic than a week ago if stocks can't rally on good news.

The answer to the market's mysterious refusal to rally is probably a lack of desire by fund managers to put more money to work. They're already long the market. With the major averages up 60% off their lows they don't want to sell before year end and potentially create a taxable event. Yet their desire to chase stocks has cooled with the weather. Without any sellers I suspect that stocks will slowly drift higher and we'll probably see a little window dressing right before the month end to paint the tape and make sure the quarterly reports look good for you. Or maybe I'm just being hopeful that we'll wrap up the last two weeks of the year on a high note. I would certainly be a lot more optimistic if the S&P 500 can breakout from this five-week trading range.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Transportation Index:

Weekly Chart of the Transportation Index:

Chart of the Russell 2000 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown

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