Federal Reserve Chairman Janet Yellen decided to play the role of Santa Claus and gave the stock market a huge gift on Wednesday. Before the FOMC meeting the S&P 500 had fallen more than 100 points and was off more than -4% from its highs before rocketing higher on the Fed's comments. As many expected the Fed did change their "considerable period" language but replaced it with an equally dovish "patient" comment. Investors believe the Fed will not rush to raise rates and stocks surged higher.

The Dow Industrials had the biggest point moves after falling more than -900 points in the prior seven days and then rebound +740 points in the last three sessions. The S&P 500 index bounce on Wednesday and Thursday was the biggest two-day gain since March 2009. The Wednesday-Friday rally is the biggest three-day gain since 2011. Crude oil remained in focus and last week WTI crude traded below $55 a barrel but Friday saw a big bounce (+6.7%) and closed at $57.77 a barrel. Brent crude ended the week near $62. Oil stocks saw some pretty big bounces. The oil index was up +10.1% while the OSX oil services index added +10.9%. Janet Yellen did comment on oil but said the weakness was temporary.

There was also some speculation that the sell-off in oil might be over soon as crude looked like it was finding support. After a nearly -50% drop from its summer 2014 highs oil is very oversold. Technically it's due for a bounce. You can see on the intraday chart below that oil prices may have formed a bullish double bottom but this might only set up for a short-term bounce (counter-trend rally) before turning lower again. More on oil in a bit.

Weekly Chart of the USO oil ETF

Intraday Chart of the USO oil ETF

Economic Data

U.S. economic data was mixed. Housing starts dipped -1.6% in November to an annual pace of 1.028 million. Building permits saw a bigger decline of -5.2% to a pace of 1.035 million. Meanwhile the NAHB housing market index (HMI) inched lower from 58 to 58 (on a scale of 0 to 100). You can learn more about the HMI here: What is the NAHB housing market index.

The government said U.S. industrial production came in significantly better than expected with a +1.3% gain. This is the biggest one-month jump since a +1.6% surge back in May 2010. Meanwhile U.S. manufacturing rose +1.1% and finally rallied past its pre-recession peak. There was also good news with the capacity utilization numbers rising to 80.1 in November, up from 79.3 in October. That's the first time utilization has been above 80% since 2008.

The regional Fed surveys were mostly disappointing. The New York Empire State manufacturing survey dropped from November's 10.2 to -3.6 in December. Economists were expecting a rise to 12. The Philadelphia Fed also came in worse than expected. The consensus was that last month's reading above 40 was unsustainable and analysts expected a drop to 26 but the Philly Fed survey fell to 24.5. Meanwhile the Kansas Fed manufacturing survey continued to inch higher with an improvement from 7 to 8 in December. This marks the 12th month in growth territory in a row.

The big drop in oil prices is putting downward pressure on inflation. The Consumer Price Index (CPI) fell -0.3% in November after being flat in October. This drop was all thanks to lower energy prices, which plunged -3.8% in November. Excluding the volatile food and energy components the core-CPI actually rose +0.1%, which was in-line with expectations.

Overseas Economic Data

There were a lot of headlines overseas. Germany's Ifo business climate survey improved from 104.7 to 105.5. The United Kingdom's retail sales came in way above estimates with a jump from +1.0% to +1.6%. Analysts were only expecting +0.3% growth. France said their manufacturing PMI slipped from 48.4 to 47.9. Numbers below 50.0 suggest economic contraction. The Fitch rating agency downgraded France's sovereign rating from AA+ to AA.

Switzerland was making headlines with their decision to impose a -0.25% negative interest rate on bank deposits. There has been a flood of money into the Swiss banking system and they're trying to stem the tide. The plan was to lower the three-month LIBOR rate below zero and it is working. On Friday their 3-month LIBOR rate was at -0.046 percent. It was the first time Switzerland has used negative deposit rates since the 1970s. Swiss National Bank President Thomas Jordan noted that weakness in Russia and the Russia currency was a significant challenge and one of the reasons for their decision.

The Russian economy is crashing. The combination of economic sanctions from Europe and the U.S. combined with plunging crude oil prices is killing their economy and their currency. Right now estimates suggest the Russian economy could contract -5% in 2015. The ruble has been in freefall and Russia's central bank tried to stop the slide with a surprise interest rate hike Monday night from 10.5% to 17.0%. That's an incredible jump of 650 basis points. Unfortunately the hike only produced a temporary bounce in the ruble. As of Friday the Russian ruble had fallen to 72.7 against the euro and 59.5 against the U.S. dollar.

The parade of headlines didn't stop with Europe. Last week there were some disappointing numbers out of China. There was some talk from the central bank of China suggesting China's growth could drop to +7.0% early last week. The most recent data on their residential market showed home prices falling another -3.7% year over year. They saw declines in all 70 cities surveyed. This is the seventh month in a row that home prices have dropped. Another disappointment was the latest China HSBC manufacturing PMI reading, which slipped to 49.5. Numbers under 50.0 suggest economic contraction. The combination of falling home prices and slowing PMI data suggested the People's Bank of China might announce even more stimulus to boost their economy. Then again they might not. Every four years China does a detailed census of their economy. The latest numbers came out last week and they revised their economic numbers to show their economy is $308 billion bigger than previously estimated. This could adjust their 2013 GDP by an additional +3-to-4% and suggest their 2014 GDP numbers could also be revised higher. (FYI: If you missed it, earlier this month China surpassed the U.S. as the biggest economy on the planet).

Headlines out of Japan were relatively quiet. The big news was the prior weekend's election. As expected Prime Minister Shinzo Abe's LDP coalition did win the supermajority they needed but voter turnout was extremely low. It does mean that Abe's current path of extreme stimulus will likely continue. Meanwhile Japan said their manufacturing PMI inched higher from 52.0 to 52.1. The Bank of Japan upgraded their outlook on industrial output, exports, and housing.

Major Indices:

The big cap S&P 500 index soared from Tuesday's low near 1,972 to a high of almost 2,078 on Friday. That's a +5.3% bounce and put its gain for the week at +3.4%. Year to date the S&P 500 is up +12.0%. The index has gone from short-term oversold to short-term overbought and hovering just below resistance at its all-time highs in the 2,080 area.

If the S&P 500 can breakout then the next resistance level is probably round-number, psychological resistance at the 2,100 mark.

chart of the S&P 500 index:

The NASDAQ composite also produced a +5% bounce from last week's intraday low to Friday's intraday high. You can see on the daily chart below the NASDAQ was respecting some of the technical levels with a bounce near the 38.2% Fibonacci retracement (also near its simple 100-dma that is not displayed).

The 4,800 area remains overhead resistance. A breakout there probably signals a run toward 4,900 and soon investors will be focused on the 5,000 mark. What are the odds that we see the NASDAQ trading above 5,000 by March 2015? It was March 2000 when the NASDAQ peaked at 5,132.

Last week's gain of +2.4% puts the NASDAQ's 2014 gain at +14.1%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 delivered the strongest performance among the major U.S. indices. After breaking down below support in the 1,140 area and under its 50-dma and 200-dma, this index reversed sharply with a rebound from 1,134 to almost 1,200 by the Friday afternoon high. That was a +5.7% bounce and the $RUT ended the week with a +3.77% advance.

More importantly the $RUT has broken through resistance in the 1,190 area. It's possible that 1,200 is round-number resistance but I suspect that last week's breakout sets up for a run toward the $RUT's all-time highs in the 1,212 area. Year to date the $RUT is now up +2.7%.

chart of the Russell 2000 index

Economic Data & Event Calendar

There is only one significant report on the calendar this week. That is the U.S. Q3 GDP revision. Economists are estimating that the numbers could be revised lower from +3.9% growth down to +3.3% growth. However, there are some whisper numbers out there suggesting Q3 GDP could actually be revised higher, above +4% growth.

The U.S. markets will close early on December 24th at 1:00 p.m. and will be closed all day on the 25th for the Christmas holiday.

Economic and Event Calendar

- Monday, December 22 -
Existing Home Sales

- Tuesday, December 23 -
New Home Sales
Durable Goods Orders
Q3 GDP estimate
University of Michigan Consumer Sentiment
Personal Income & Spending

- Wednesday, December 24 -
Weekly initial jobless claims
U.S. markets close early (Christmas Eve)

- Thursday, December 25 -
U.S. markets are closed for Christmas

- Friday, December 19 -
(nothing significant)

Additional Events to be aware of:

Jan 1, 2015 (Thursday) - Market's closed for New Year's Day

Looking Ahead:

As we look ahead at the last week and a half of 2014 the seasonal trend is up. The stock market's big bounce has rejuvenated investor sentiment. Two weeks ago everyone was pretty gloomy with the sharp sell-off in stocks but now we're back to testing record highs on the big cap indices.

Traditionally the last several days of the year and the first couple of trading days in January is bullish. This has been affectionately called the Santa Claus rally. Over the last 64 years the S&P 500 has averaged a gain of +1.5% during this time period. One has to wonder if Santa came early this year with the huge gains over the last three days.

As we get closer to January we are going to hear more discussion of the "January effect" where small caps are expected to outperform the rest of the market. Over the last 90 years or so small caps have tended to outperform big caps in January. There has been some speculation that maybe this is a trading phenomenon where investors sell their small cap losers in December for tax purposes and then buy them back in January. We also have the impact of workers putting some of their Christmas and yearend bonus money into their stock portfolio. This gives fund managers a big influx of money to invest in January.

Trading volume in the market should decline significantly with only six and a half trading days left in 2014. It's common for Wall Street trading desks to wrap up all of their significant activity this past week and shut down for the holidays. The lack of volume could generate more volatility.

Investors will still be watching crude oil. Dennis Gartman, an influential trader and editor of "The Gartman Letter" believes that oil's slide is not over yet. Gartman isn't giving any price targets on how low oil will go. He is pointing at the history of crude oil and how oil has fallen -90% from its peaks multiple times. Essentially Dennis is suggesting oil is going to fall a lot farther than people expect.

It seems that Russian President Vladmir Putin agrees with Gartman. This past week Putin warned his country that crude oil could fall to $40 a barrel before bottoming. That's bad news for a country whose biggest export is oil and natural gas.

Summing things up the seasonal trend for equities over the next several days is bullish. Low volume could generate more volatility but at the same time we could see movement stall with most investors focused on their holidays instead.

I've been writing this LEAPS newsletter for about six years (the actual anniversary will be March 2015). I want to say thank you to all the readers out there that make this newsletter possible.

Merry Christmas!

~ James

Enjoy "Twas the Night Before Christmas" poem: (4 minute youtube video)