It’s That Time of Year


“But I heard him explain, ‘ere he drove out of sight, “Happy Christmas to all, and to all a good-night!”" – Twas the Night Before Christmas, usually attributed to Clement Clark Moore

As we wind into the last week of the year, the “Santa Claus” trading period officially kicked off on Friday the 23rd. Tradition holds that the period comprises the last five trading days of December plus the first two of January. Looking ahead to the rest of the period, on the plus side for a continued drift upward are light trading conditions, European officials away on holiday, and a desire to market the tape higher.

The hazards for next week include the chance of a poor sales report for Monday the 26th (we’re not predicting it, but such an eventuality would disappoint), tax-loss selling by hedge funds, and the possibility that some journalist somewhere (but probably from London) will try to get some European official somewhere to blurt out something untoward, after too much sherry (and if that doesn’t work, rehashing a three-month old scare piece might serve).

We would also be remiss if we didn’t point out that at the end of last quarter, there was clearly more ammunition deployed by those short the market, compared to those who were long. We don’t expect a repetition, but it could happen.

Some chart points to be aware of: a long-term downtrend in the S&P 500 from October, 2007 lies just above in the 1260 range. It forms the top of a wedge pattern that the index recently broke to the downside, not so encouraging technically for the long term. At the same time, the 12-month moving average for the S&P is around 1280, so the market could be hard put to break above the 1260-1280 range.

Charts, of course, matter the most when nothing else does. Significant events and real fundamentals always trump technical factors, but left to drift traders will focus on them for lack of an alternative – which sounds like the base case for next week. In addition, there are always money pools using technical strategies and their presence is more noticeable when trading is light and/or uncertain. Next week rates to stay dull, but the last couple of days might surprise if some kind of tape-marking battle breaks out.

The economic news last week was good so far as employment and confidence goes, with adjusted weekly claims falling to a three-year low (the raw data looked relatively better too). However, personal income and spending for November were both lower than expected, and business capital spending fell again as the calendar begins to run out on the accelerated depreciation tax treatment. GDP for the third quarter was revised down again, this time to 1.8% annualized (and the year-on-year rate 1.5%). The inventory bulge from October continues to work itself off in various ways.

Retail sales reports have been mixed. The weather should help year-on-year comparisons (though not for winter apparel), but it doesn’t look as if December is going to be a bang-up month. Moderately better is our prognosis.

Next week’s light calendar is mostly surveys, with the highest-profile being consumer confidence on Tuesday and the Chicago purchasing index (PMI) on Thursday.

All U.S. markets will be closed on Monday, December 26th. Merry Christmas to all, and to all a good night!

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