Wall St Week Ahead: Is Santa Claus rally almost done?

By Edward Krudy

NEW YORK, Dec 10 (BestGrowthStock) – The December rally may be
reaching its climax, with just two weeks to go before Santa
Claus makes his midnight run. Dwindling volume, excess
optimism, and history all point to a stock market that could
be running out of steam.

Investors appear to have grown complacent as the CBOE
Volatility Index, or VIX (.VIX: ), has fallen to levels not seen
since April. Stocks have made new highs on almost a daily
basis. The S&P 500 (.SPX: ) closed on Friday at its highest
level since September 2008 and the Nasdaq (.IXIC: ) scored its
best finish since late December 2007, with many expecting
gains to run through the end of the year.

But Cleveland Rueckert, an analyst at Birinyi Associates
in Stamford, Connecticut, believes the year-end rally may be
largely done.

“The majority of that gain may already have occurred,” he
said. “Most people are more likely to be closing out their
books at the end of the month and looking for opportunities to
open new positions at the start of the next month.”

Rueckert said that over the last 65 years, when the S&P
500 has rallied at year’s end, the average gain has been 3.4
percent between Thanksgiving and New Year’s. So far, the index
has risen 3.5 percent since the start of the period.

“A lot of stocks this year have had very big gains and it
really wouldn’t be surprising to see a lot of the managers
close out positions and take some vacation time,” he said.

When trading resumes on Monday, that will start the last
five-day trading week before Christmas. The following week
will be cut short by the holiday. With Dec. 25th falling on
Saturday this year, the U.S. stock market will be closed on
Friday, Dec. 24th, in observance of the Christmas holiday.

Inflation data for November will dominate next week’s
economic calendar, with the U.S. Producer Price Index due on
Tuesday and the U.S. Consumer Price Index set for Wednesday.

BULLS IN THE EGGNOG

Some see signs of the bulls getting into the eggnog.

The American Association of Individual Investors’ latest
sentiment survey shows bullish sentiment reached a four-week
high. What’s more, bullish sentiment has spent 14 weeks above
its historical average — its longest streak in six years.

That is often seen as a contrarian indicator.

This week, the S&P 500 has broken through closely watched
resistance levels and has climbed for six of the last eight
days to close at fresh two-year highs.

But gains have been accompanied by decreasing
participation. Average volume during the last three days of
the week was 7.76 billion, well below this year’s daily
average of 8.62 billion.

“We are entering now the beginning of the seasonal pattern
where volume really dries up,” said Nicholas Colas, chief
market strategist at the ConvergEx Group in New York. “It
seems like it’s starting a little sooner than usual.

“I don’t think we’re at any risk of a meaningful sell-off
into the end of the year, but I think the basic contours of
what the economy looks like are pretty well set,” he said.

That sentiment was reflected in the VIX, also known as
Wall Street’s favorite barometer of investor fear. Although
the VIX edged up on Friday, the index has fallen for six of
the last nine sessions. It now stands at 17.61 after hitting
its lowest since April.

The 15-day moving average of the advance/decline ratio on
the New York Stock Exchange, a measure of the proportion of
advancing to falling stocks, has started to slip and currently
stands at around 1.5. It peaked this year in July at about
double that, according to Reuters data.

In addition, the 3-day moving average of stocks making new
52-week highs has also turned lower after a spurt at the start
of the month. It now stands at around 125, down from more than
250 at the start of the month.

The breadth and ratios have not been “on board” this rally
of late, according to a report from McMillan Analysis Corp.
Equity-only put-call ratios remain on “sell” signals, the
analysts say.

Chart-minded investors are bullish. The S&P 500 has closed
well above 1,228, the 61.8 percent Fibonacci retracement of
the 2007-2009 bear market slide, a key technical level.

“When a market surpasses a certain retracement level, then
the probability increases of a rise to the next retracement
level, which in this case would be a 76.4 percent retracement
and that’s a ways up at 1,362,” said Chris Burba, short-term
market technician at Standard & Poor’s.

The 1,120 level, the top of a recent trading range, is
seen as strong support.

On Friday, the S&P 500 closed at 1,240.40 and was up 1.3
percent for the week. The Dow Jones industrial average (.DJI: )
ended Friday’s session at 11,410.32 and was up just 0.2
percent for the week. The Nasdaq closed on Friday at 2,637.54;
for the week, the Nasdaq was up 1.8 percent.

LOOK OUT FOR FED HAWKS

An agreement to extend the Bush-era tax cuts over the next
two years has started to seem like less of a done deal. The
agreement is expected to be approved by the U.S. Senate on
Tuesday, but could face a tougher road to passage in the
House.

If the legislation stalls, resulting in higher capital
gains and dividend taxes at the start of next year, then U.S.
stock prices could fall.

The Federal Reserve’s policy-making body, the Federal Open
Markets Committee, will convene on Tuesday for its last
meeting of the year. The recent clutch of stronger economic
data could spark a debate over how far to stretch the central
bank’s $600 billion stimulus plan, designed to keep interest
rate low through bond purchases.

“The hawkish members on the Fed may seize on this cluster
of strong numbers and use them to support the argument
against” quantitative easing, said Pierre Ellis, senior global
economist at Decision Economics in New York.
(Wall St Week Ahead appears every Friday. Questions or
comments on this column can be e-mailed to:
edward.krudy(at)thomsonreuters.com)
(Reporting by Edward Krudy; Additional reporting by Caroline
Valetkevitch and Doris Frankel; Editing by Jan Paschal)

Wall St Week Ahead: Is Santa Claus rally almost done?