Early Rally Battered by Fed Rate Decision

Although there was no change in federal funds rates when the FOMC announced their decision at 2:15 pm on Wednesday, there was enough of an indication from the central bank committee that other aspects of their recent easy money policy were coming to an end. The statement which accompanied the "no change" decision was sprinkled with enough mention of the end of certain Fed programs and strengthening economic conditions to scare off year-end investors as the trading session ground to a close.

Even their opening sentence, "Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating, " was more bullish than previous announcements, a sign that the Fed would probably change the key wording: "exceptionally low levels of the federal funds rate for an extended period" within the next two meetings and that rate increases would be forthcoming by Summer of 2010.

The trick for traders is in the timing of their trades and the key at this particular time is to get out ahead of any Fed rate increase, because that event will almost certainly result in halting stocks' heady advance. As it is, the great rises in stocks has recently abated to a large degree, as trading since the last Fed meeting has been mostly sideways to slightly higher. Locking in gains or selling losers for the year would seem to be imminent following one of the last great market-moving events of the year.

With strong mention concerning the ending of certain liquidity programs, the Fed's last paragraph really set the tone for this meeting and what would occur in terms of policy in the first months of 2010.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

With all of these programs coming to an end, the Fed obviously sees the US economy as essentially healed and will begin to focus more on reining in liquidity and keeping inflation under control. Most astute economy watchers believe that the Fed will begin to raise rates during the second quarter of 2010, if not sooner, and will increase them 25 to 50 basis points at a crack until the end of the year. By this time next year, the federal funds rate should be approaching 2% with 2 1/4% at the high end. That should certainly be accommodative enough to keep stocks from keeling over and low enough to not hamper economic growth.

As the market wound down, traders took the Fed's message to heart, trimming some of the day's earlier gains and actually sending the Dow to its second straight negative close. Other indices managed to hold onto marginal gains. The broader market, as measured by the NYSE composite, outperformed all other indices handily.

Dow 10,441.12, -10.88 (0.10%)
Nasdaq 2,206.91, +5.86 (0.27%)
S&P 500 1,109.18, +1.25 (0.11%)
NYSE Composite 7,180.76, +39.32 (0.55%)

Simple indicators were out of line with the modest headline numbers, most likely due to speculation on less-followed stocks as options expiration neared (Friday). As a matter of fact, much of the movement in stocks the past two days was more than likely unduly influenced by options, as Friday is a quadruple witching day. Advancing issues finished well ahead of decliners, 4089-2429. New highs outpaced new lows, 538-83. Volume was better than normal, another factor of options expiration at the end of the week.

NYSE Volume 5,370,022,500
Nasdaq Volume 2,037,267,500

Commodities responded to a weaker dollar prior to the Fed announcement, though the buck strengthened after the decision. Oil rose $1.97, to $72.66, though much of that gain was attributed to government figures showing a decline in inventory of 3.9 million barrels. Gold gained $13.00, to $1,136.00; silver was higher by 24 cents, to $17.70.

Other economic news included November CPI data which showed consumer prices increasing at a rate of 0.4%, in line with expectations. Housing starts and building permits were also up.

Looking ahead to Thursday, initial unemployment claims are expected to continue to moderate down to 450,000, though that number would, in normal times, be a cause for panic, considering it is the height of the retail season and jobs should be plentiful. Such a number indicates that the economy is not as yet fully healed, with jobs creation remaining extremely weak. Uncertainty of government measures, notably the health care debate and consideration of higher taxes, plus the overhang on business from last year's near financial meltdown, are contributing to slack demand for labor.

That should ease by Spring and Summer of 2010, but for now, the numbers are still quite discouraging, especially for those seeking employment.

Fed Chairman Ben Bernanke was named Time magazine's Person of the Year, which was probably more of a planned coincidence than happenstance. Bernanke is scheduled to be re-appointed for another term by the Senate tomorrow. Speaker of the House Nancy Pelosi was runner-up for the honor, which says plenty about the rigor of the selection committee.

Ending String of Advances, Markets Lower Ahead of Fed

Was Monday the top?

A day after reaching 14-month highs, stocks trended lower on Tuesday on inflationary PPI data (+1.8%, more than double the predicted rise) and a strengthening US Dollar.

It was a confusing day fro traders in everything from stocks to currencies to commodities as markets moved in unusual directions in relation to each other. Oil managed to post its first gain after nine straight sessions in the red, while stocks broke a string of five straight winning sessions. Gold and silver fought against the flat line all day long.

Other economic news items sent mixed messages. The Empire State manufacturing index suffered a steep decline, dropping to a level of 2.55 in December after posting a figure of 23.51 in November. Nationally, capacity utilization continued to improve, up to 71.3% in November, following a reading of 70.6% in October.

Meanwhile, fears of more banking capitulation in Europe took on new meaning as Austria nationalized a major regional bank overnight.

Also weighing on the market was the issuance of more than $50 billion in new stock hitting the markets, stemming from the repayment of TARP funds by Bank of America, Citigroup and Wells Fargo. The idea that the market could sustain itself with so much new paper on the street without as much as a hiccup stoked the backs of the bulls. Shares of major banks, including Dow components JP Morgan Chase (JPM) and Bank of America (BAC) fell sharply during the session, however.

Struggling through most of the day in the red, the major indices slumped to intra-day lows in the final hour even though the losses were somewhat compromised by the release of comments from Fed Chairman Ben Bernanke with less than 15 minutes left in the trading day. Those comments, obviously timed to prevent a major sell-off prior to tomorrow's FOMC policy statement, cut the losses on the Dow by about 1/3. Nonetheless, stocks finished near the lows of the day with many investors seeking clarity on a range of issues from inflation to whether China would continue buying US treasuries.

Dow 10,452.00, -49.05 (0.47%)
NASDAQ 2,201.05, -11.05 (0.50%)
S&P 500 1,107.93, -6.18 (0.55%)
NYSE Composite 7,141.44, -45.05 (0.63%)

Market internals were clearly bearish. Losers beat winners, 3993-2529. New highs continued to outpace new lows, though by a margin less than Monday's extreme, 423-70.

NYSE Volume 5,604,492,500
NASDAQ Volume 1,921,278,875

Crude oil for January delivery was up $1.18, to $70.69. Gold lost $1.10, to $1,122.70, while silver gained 13 cents, to $17.47.

There was more than enough conflicting data and news to confound investors, and, if markets hate anything, it is uncertainty, of which there was an oversupply.

The avalanche of data will only worse on Wednesday, with November CPI, building permits, housing starts and the Treasury's current account balance on tap prior to the opening bell. Shortly after 2:00 pm, the Fed is expected to keep interest rates steady, though the statement wording will be closely watched for signs that the central bank may be considering raising rates.

It seems that the Fed has already tipped its hand concerning the all-important statement, not wanting to destroy the rally so close to Christmas. There's something to be said about Fed Chairman Bernanke: he definitely does not want to take away the punch bowl at the height of the party, but eventually that is what he will be forced to do. In the meantime, Treasuries have been rising over the past two months, which should serve as signal enough for investors that the top may already be in for stocks, or, at the very least, very close.

Wall Street has had a phenomenal year, considering how it began. Whether the markets will sustain themselves though the end of the year will be partially answered tomorrow after 2:00 pm.

Higher Hurdles for Stocks

With a dozen trading days left in the year, stocks pushed ahead to 14-month highs on Monday. Though the markets were relatively calm, there seemed to be an absence of both fear and sellers, especially after the government of Abu Dhabi rescued the failing ventures in neighboring Dubai with $10 billion in emergency assistance, as $3 billion in notes came due today.

The Middle East bailout spurred more dollar weakness, which translated into higher stock prices on the US exchanges. The Dow, in particular, lagged the other indices due to a pre-market announcement of oil conglomerate ExxonMobil's (XOM) $41 billion bid to purchase XTO Energy (XTO), primarily for it's natural gas business. The all-stock deal pushed shares of XOM down more than 4% on the session. Of the 30 Dow stocks, XOM was easily the biggest loser, as 25 stocks posted gains.

All of the major indices made year-to-date and 12-14-month highs, including the Dow Transportation Index, which confirmed the move in the Dow. Despite stocks breaking out to new highs, there was no lack of appetite for stock buyers and no sellers anywhere in sight. The Dow has closed higher six of the past seven sessions. Market sentiment is about as bullish as it can get.

Dow 10,501.05, +29.55 (0.28%)
NASDAQ 2,212.10, +21.79 (0.99%)
S&P 500 1,114.11, +7.70 (0.70%)
NYSE Composite 7,186.49, +61.37 (0.86%

Simple indicators were decidedly one-sided, as advancers trounced decliners, 4689-1868. New highs led new lows, 509-70, despite low volume and end-of-year tax issues.

NYSE Volume 5,059,216,500
NASDAQ Volume 1,855,139,750

Oil fell for the 9th day in a row, losing 36 cents, to $69.51. The metals were slightly on the upside, with gold higher by $3.80, to $1,123.80, and silver gaining 25 cents, to $17.34.

There was barely any concern over the upcoming Fed announcement on Wednesday. Traders are convinced that the Fed will do nothing in terms of rate policy though there are rumblings that some of the critical wording in their accompanying statement may begin to indicate a less accommodative stance.

Looking over the economic horizon, the week is full of reports, including PPI, Capacity Utilization and Industrial Production on Tuesday, and CPI, Housing Starts and Current Account Balance all due on Wednesday in advance of the Fed statement.

Unless those economic reports are dazzlers or the Fed changes some of the crucial wording (especially the term "extended period" in relation to how long they expect to keep rates low) in their statement, it looks like smooth sailing for stocks through the end of the year. It's difficult to argue that point being that 2009 will go down in market history as one of the best ever for stocks.

Although some analysts say that stocks are pricey right now, it doesn't seem to be bothering those still participating in one of the market's greatest bull rallies.

Defying Dollar, Dow Closes Within 8 Cents of 52-Week High

For more than a little while, the trade has been to sell US dollars and buy US stocks. On Friday, the story was rather different, as buyers of Dow stocks, in particular, defied the dictum of the carry trade, buying stocks while the US Dollar was rising against other currencies. The questions on everybody's mind were, "Why?". Why now?", and "What about that Fed meeting next week?"

Answers for traders were not forthcoming, as they were bidding up Dow stocks to within 8 cents of its 52-week high at the close. That finish was meaningful, for a variety of reasons, not the least of which had to do with answers to the questions posed above.

Taking them one by one, here's a quick explanation:

Why? The reasons people buy stocks as they approach 52-week highs are as numerous as there are grains of sand on the beach, but in this case, it seemed to be with ulterior motive. Other possibilities include a massive short squeeze on Alcoa (AA), which was up a whopping 1.11, (8.22%). November retail sales came in better than expected (+1.3%) and the University of Michigan Consumer Sentiment reading was higher, at 73.4, following last month's 67.4. Naturally, that good news should have produced a stronger dollar. They did, but, remember the ulterior motive. Read on.

Why now? Stocks were bid up precisely to just below their closing 52-week high just in case technical analysts were peering in on the activities, and they surely were. Today was a planned day for such a rise because it had two significant elements going for it. First, it was Friday, meaning positions would be locked in until Monday, and, second, there is a Fed meeting next week in which it is widely expected that the FOMC will leave rates unchanged, but give more hints as to the exact date of the first, in what no doubt will be a series of, rate hikes. The other kicker is that some of that dubious Dubai debt is supposed to be repaid on Monday, and, if it isn't, chaos in financial markets could ensue.

What about that Fed meeting next week? As answered above, the FOMC will meet to discuss policy on Tuesday and Wednesday, the 15th and 16th, culminating in a policy decision and statement on Wednesday, right around 2:00 pm. That also coincides with options expiration on Friday, and if you think there aren't a boatload of players in that space, betting and hedging on the Fed decision, maybe you should go back to playing euchre with friends for nickels and dimes.

Obviously, there is a good deal of money riding on the events of next week, and the markers were laid down yesterday and today, but especially today, with the apparent end of the dollar carry trade. Don't buy into the argument that positions short the dollar and long stocks don't matter any more. That trade was very prevalent and has yet to be unwound. Today's rise on the Dow was a shot fired across the bows of many hedge funds who are trapped in losing positions. Fireworks should be expected right out of the gate on Monday.

Whoever was in control of today's trade on the Dow was using a great deal of leverage, meaning that today's move was very transient and temporary. Ask yourself if you'd be buying stocks at the end of the year, just as they're reaching new highs - highs, mind you, that have yet to be surpassed in any meaningful way since the end of October. Consider these data points for closes on the Dow, all 52-week highs:

November 17: 10,437.42
November 23: 10,450.95
November 25: 10,464.40
December 1: 10,471.58

Today's close was at 10,471,50 and there was no confirmation by the S&P or, even more importantly, the Dow Transportation Index. Ooops!

As a point of reference to illustrate just how difficult this area of resistance is proving to be, consider these recent closes on the S&P:
November 17: 1110.32
November 18: 1109.80
November 23: 1106.24
November 24: 1105.65
November 25: 1110.63
December 1: 1108.86
December 2: 1109.24
December 4: 1105.98

Today's close of 1106.41 is another meaningless near-top. Clearly, there's a distribution pattern taking place which is preventing stocks from breaking out to new highs.

By all accounts, it's just not going to happen. At least not any time soon. Take heed of the usefulness of the dollar carry or risk trade, and ignore the movements of today as just so much market noise. Buy low, sell high. What do you think the real tradrs are doing here?

And just in case you were wondering, the Dow finished higher for the week, with the NASDAQ and NYSE Composite lower. The S&P actually ended the week with a fractional gain, or, essentially flat.

Dow 10,471.50, +65.67 (0.63%)
NASDAQ 2,190.31, -0.55 (0.03%)
S&P 500 1,106.41, +4.06 (0.37%)
NYSE Composite 7,125.12, +20.62 (0.29%)

Advancers outnumbered decliners, 4043-2402, though you would have hardly guessed it looking just at the tape. Dow stocks were 21 up with 9 down. The two biggest movers to the upside were Alcoa (AA) and Bank of America (BAC), two dubious leaders, to be sure. New highs beat new lows, 348-60. Besides the days before and after Thanksgiving, NASDAQ volume was the lowest since September 4, a date that also preceded a holiday - Labor Day. NYSE volume was about average.

NYSE Volume 4,408,781,000
NASDAQ Volume 1,762,412,125

More evidence of some deviousness at play came from the commodities pits, where oil sold off for the 8th straight day, losing 89 cents, to $69.65. Meanwhile, major oil company Dow stocks, Chevron (CVX) and ExxonMobil (XOM) both traded higher throughout the session and finished with small gains, though gains nonetheless.

Gold, one of the main catalysts behind dollar strength, traded down again, off $6.60, to $1,119.60. Silver followed suit, losing 10 cents, to $17.09.

One should be well advised going into next week to not read very much into this week's action. Since stocks are at their highs, you've likely missed the move if you were not participating. If you were in, this could be a great time to take a little off the top or close positions should that be your preference. There's been plenty of play in March Index options against the Dow and S&P in particular. Large positions have been placed well out of the money, and while they may be there for protection, the possibility of a sharp correction, which has not yet occurred since the March lows, is growing. Eventually, there is going to be a 10-20% or larger downturn, though the timing of such an event is uncertain.

All good traders, like Boy Scouts, should be prepared.

Higher Day on Dollar Indifference

Stocks moved higher again on Thursday in tepid action, closing well off the highs made in the first fifteen minutes of trading. Once the Dow moved higher by 100 points at the open on the back of a rather poor unemployment report - up to 474,000 new claimants as opposed to 454,000 the week before - stocks quickly moved lower to test the gap-up open and then proceeded to trade in a 40 point range for the remainder of the session. With the trading volume low and lack of participation seen as a major detriment, stocks traded without conviction, just as they did on Wednesday.

Dow 10,405.83, +68.78 (0.67%)
NASDAQ 2,190.86, +7.13 (0.33%)
S&P 500 1,102.35, +6.40 (0.58%)
NYSE Composite 7,104.50, +36.88 (0.52%)

Advancing issues beat decliners, though by a slim margin again, 3327-3128, with most of the winners residing on the NYSE. There were 327 new highs, to just 55 new lows, with the margin expanding for the first time in five days. Volume was as dull as it has been all week long.

NYSE Volume 4,592,418,500
NASDAQ Volume 1,950,587,875

Oil took another small hit, down 13 cents, to $70.54, the lowest level since mid-October and the sixth straight session in which the price has declined. The slippery stuff traded briefly below $70 a couple of times during the session, though, like stocks, there was little to no influence from the dollar trade, which also traded in a narrow range of just 0.20, finally hitting the key 76.00 level just as the stock markets were closing. Gold finished highre for a change, breaking a string of losses with a gain of $5.50, to $1,126.40. Silver did likewise, up a peevish 3 cents, to $17.21.

The lack of interest in the dollar movement kept every trading vehicle in tight ranges. It's a very dull market, facing end-of-year issues, low participation rates and a slew of unresolved conditions, such as the US employment condition, debt issues from Dubai, to Greece, to Spain, increasing residential foreclosures and a sluggish worldwide recovery.

Tomorrow's end-of-week trading will be aided by guidance before the bell from November retail sales, which are expected to be modestly higher, though those expectations may still be out of line with reality. Even more important will be December retail sales, though those won't be fully known until well after the fact.

Therefore, investors are sailing a ship without much of a rudder and a broken compass. Stocks have been in a holding pattren since the end of earnings season, three weeks ago. Hopes for a "Santa Claus Rally" are fading about as quickly as Tiger Woods marriage vows.