The fight is back on in Washington as republicans and democrats verbally spar over how to solve the fiscal cliff issue. The back and forth all week left both sides at a stalemate. Yet in spite of this lack of progress the stock market delivered another healthy gain. That's a sign of confidence by investors that they do expect a deal to get done before the end of the year. We will have to wait and see if investors can maintain this confidence as we get closer to yearend.
Most of last week's headlines were about the ongoing battle over the fiscal cliff. However, Europe had a few headlines of its own. Early in the week there was doubt over if a deal to restructure Greece's debt would get done and approved. Then it seems a deal had been reached. By Friday the deal was in jeopardy again with the International Monetary Fund (IMF) threatening to pullout. The next batch of bailout money due to Greece remains in doubt. On top of it all there is supposed to be a Greek referendum scheduled for a vote on December 5th to see if Greek citizens want to remain in the Eurozone.
If that wasn't enough the Moody's credit rating agency downgraded the ESM And EFSF bailout funds from AAA to Aa1 due to France recently losing its AAA rating. France was one of the largest backers behind these rescue funds.
Looking at the economic news last week most of it was pretty good. The durable goods data for October was unchanged versus estimates for a decline following a +9.2% jump the month before. The Case-Shiller 20-city home price index surged +3.0% following a +2.0% jump the month before. Consumer confidence continues to rise with an improvement from 72.2 to 73.7. The Federal Reserve released their Beige book report, which delivered more of the same moderate to modest growth. The weekly initial jobless claims came in better than expected at 393,000, which was down from 416K the prior week. The second estimate on the Q3 GDP jumped from +2.0% to +2.7%. The Chicago PMI data for November bounced back from a two-month dip into contraction territory and closed above the key 50.0 mark at 50.4.
The S&P 500 index stretched its bounce to two weeks in a row. There was a mild two and a half day pullback Monday-Wednesday. Traders bought the dip near its 200-dma and the index rebounded back to +0.5% gain for the week. Currently the S&P 500 index sits just under resistance near 1420 and its simple 50-dma (1421).
The key levels to watch are support at 1400 and 1380 (really the 200-dma at 1385) and resistance at 1420 and 1440.
FYI: For the year the S&P 500 is up +12.6%.
chart of the S&P 500 index:
Another strong week for high-profile tech names like AMZN, GOOG, and AAPL helped fuel a +1.4% rally in the NASDAQ composite. The NASDAQ has pushed past resistance near its 200-dma and the 3,000 level. Now it sits just under technical resistance at its 100-dma (3019) and its 50-dma (3023).
The NASDAQ is already up 200 points (+7.1%) from its November lows. I would still not be surprised to see some profit taking. There should be support near the 2950-2930 zone. If this current rally continues and the index manages to push past the 50-dma then the next level of resistance to watch is 3040-3050 and then 3100.
FYI: For the year the NASDAQ is up +15.5%.
chart of the NASDAQ Composite index:
The oversold bounce in the small caps continues to surge. The Russell 2000 index delivered a +1.8% gain for the week. Traders bought the dip on Wednesday near support/resistance at the 800 level. Now the $RUT has broken through resistance near 820 and its 50-dma. This also appears to be a bullish breakout past the multi-week trend of lower highs. For the year the $RUT is up +10.9%.
The $RUT has already seen a +7.6% bounce off its November lows. While the short-term trend is up it might be time for a pullback. There should be support in the 810-800 zone. If the rally continues then look for resistance in the 840-850 range.
Daily chart of the Russell 2000 index
The first week of the month is always a busy one for economic data. Some of the highlights to watch for are the ISM and ISM services data for the U.S. The Eurozone GDP estimates and ECB rate decision. Finally on Friday the U.S. nonfarm payroll (jobs) report, which is expected to show a drop from +171,000 a month ago to +100,000.
Of course all of the U.S. data could be significantly worse than expected as the reports try and factor in the impact of Hurricane Sandy on the east coast.
Economic and Event Calendar
- Monday, December 3 -
auto and truck sales
Eurozone PMI data
- Tuesday, December 4 -
Eurozone inflation data
Chinese HSBC Services PMI
- Wednesday, December 5 -
ADP employment change report
- Thursday, December 6 -
Eurozone GDP estimate
ECB interest rate announcement
Weekly Initial Jobless Claims
- Friday, December 7 -
nonfarm payrolls (jobs) report
University of Michigan consumer sentiment
Additional Events to be aware of:
Dec. 12th - FOMC meeting
The Week Ahead:
Last week's stock market performance was pretty encouraging considering the stalemate in Washington over the fiscal cliff. The policy battle over how to handle the fiscal cliff will continue for the next two or three weeks. The congress and senate are supposed to adjourn for the Christmas holiday on December 14th. Yet with the current fight over the cliff that will probably be postponed. None of the politicians will want to be working through Christmas.
Many are starting to speculate that we will finally see both sides compromise and reach an agreement the week of Dec. 17th through the 21st.
Therefore we probably have another week where no progress is made while both parties practice their brinkmanship. That could leave stocks to churn sideways while we wait for improvement. Then again we are approaching the seasonal time period for a Santa Claus rally in stocks.
The Federal Reserve will start making headlines again too. Their Operation Twist is scheduled to end at the end of December. Now there are new stories surfacing that the Fed might begin yet another QE program to replace Twist even though their QE3 program is open ended and was supposed to be the "nuclear bomb" option. The closer we get to December 12th we'll hear more and more about the Fed and what it can or can't do to mitigate the fiscal cliff. Of course Bernanke already said the Fed can't save the U.S. from a recession if lawmakers let us go over the cliff.
This week we're going to hear more about Greece. The IMF's threat to pull out of the latest debt restructuring deal was definitely a surprise. Current Greek bond holders are balking at yet another hair cut proposal. There is a crucial referendum (vote) in Greece on December 5th. If the results of that vote show that Greeks suddenly want to leave the Eurozone then things are going to get a lot more exciting even though several analysts have been predicting Greece would leave for over a year.
Technically we're in an interesting spot for stocks. Traders were quick to buy the dip at technical support last week. The two-week bounce has sliced through multiple layers of overhead resistance. Yet now stocks are arguably short-term overbought. Does the rally continue and turn into a Santa Claus rally? Do investors wait and let stocks churn sideways while we wait for the jobs report on Friday?
Normally the first few days of the month tend to see an influx of mutual fund money that lifts stocks. Yet with one month to go before new capital gains taxes kick in we could see more fund outflows. One issue that could delay investors cashing out before January 1st to avoid the higher taxes is the recent outbreak of special dividends. A number of corporations are issuing special one-time dividends before the yearend. Right now a popular name investors are hoping to see a dividend from is Apple (AAPL). This rush of dividend announcements will likely end around December 14th.
Further stock market gains are a bet by market participants that a fiscal cliff deal in Washington will get done before month end. If something changes and Wall Street starts to think a deal will not get done then stocks could turn weak. In the meantime the major indices seem to be respecting all the normal support and resistance levels as they rebound higher.