Home > Uncategorized > 2011/11/11: Quick Post: Santa Claus is Coming to Town… Maybe

2011/11/11: Quick Post: Santa Claus is Coming to Town… Maybe

© 2011 ROHR International, Inc. All International rights reserved.

“He’s making a list, checking it twice…” gonna buy stocks, but only if they’re nice…

…and therein lies the dilemma with any ‘Santa Claus’ rally this year.  As we have pointed out for many years now, there is no Santa Claus! This is actually much more so the “Santa Portfolio Manager” rally. The late year rally tends to be the case in years when equities are up nicely on the year, especially from the early part of the fourth quarter into the end of November.

That incentivizes portfolio managers who have any goodly amount of cash on the books to invest it rather than look ‘under invested’ compared to their peers. And no sensible manager waits until the last minute right into the holidays. In the down years there is often little or no late year rally, as the converse becomes true: managers seek to show plenty of cash.

The problem for managers attempting to ‘window dress’ their portfolios either way this year is the degree to which the US equities are right around last year’s Closing price levels. In addition they have been significantly schizophrenic of late, with major surges and downdrafts in the wake of constructive or abysmally negative news. The range of that news is also significant insofar as it encompasses everything from fiscal and debt crises to economic data and forecasts.

So it seems that Santa is quite conflicted this year as well. Whether the equities trend will continue to improve from last year’s finish, or put on another one of those sharp retrenchments back to quite a bit lower on the year remains in flux.

 

That is also consistent with extremely low fixed income yields, which leave little return available from asset classes other than those managers are willing to chase together to generate profits. It is not typical to consider the equity market a ‘risk asset’ as such. Yet, hedge fund managers who on the whole have not done very well at all this year are going to be interested in investing in anything that can produce a gain into the end of the year.

And while it is nothing nearly as blatant or specific as the Fed’s QE2 earlier this year, central banks are still highly focused on providing liquidity. That sentiment is reinforced by the degree to which last week’s European Central Bank (ECB) surprise rate cut seems to put it on somewhat of an easing path. That is necessary to offset the now obvious economic weakness in Europe. The combined effect holds the potential to create a bubble of sorts; or at the very least a bulge in  ‘risk assets’. The ‘risk on’ trade seems to be back.

General Market Observations

And that already seems to be reflected in the strength of a goodly number of commodities in spite of the general signs of economic weakness. Is there any other good reason Copper is holding up not far below 3.50, certain agricultural commodities are doing in holding up so well (Orange Juice, corn, etc.), and especially why Crude Oil is back above 95.00?

The last of those is especially important, as it reinforces that same sense of inflation bulge that was the case into this summer. Yet, the rule of thumb (as always),and dilemma for equities bears, is to not fight the trend; even if conditions become similar to those leading into August. The subtle contradiction for those who point to higher prices as a sign of the return to healthier global economy is that cost-push inflation weighs on consumers; and ultimately economies and the equities as well.

And yet, as bad as the equities looked on Wednesday, the December S&P 500 future is managing to recover at least temporarily back above its 1,240 DOWN Break and key short-term moving averages. However, daily MACD turned down on that Wednesday failure, so it is going to be very important to see whether this next trip up into (or possibly slightly above) 1,260-70 resistance is sustainable, or ends up right back below 1,240 once again. That is likely the arbiter of the overall equities trend, as the December S&P 500 future daily MACD turning down joined Europe and Japan’s already weak indications. We shall see.

EXTENDED TREND IMPLICATIONS

Long-Dated Government Bonds: As noted in recent analyses, govvies all held at or near violated resistances last week to signal sustained strength was still their most likely path spite of the rally in equities. December T-note future and the December Bund future failed to even get back down to that important lower congestion on the selloff at 129-08/-00 and 136.00-135.80, respectively. On the other hand, December Gilt future did retest the top of 128.80-.50. It is now the case that the T-note is also violating its previous topping activity, which points to a violation of 132-00 area across time. December Bund and December Gilt have already been back up around previous highs of 139.19 and 131.86 respectively, and we expect them to hold well on setbacks as long as equities stall out and weaken once again.

Foreign Exchange: US Dollar Index strength back above .7600-80 has been a perfect complement to the sharp weakness of the euro back below EUR/USD 1.3900-1.3837 low-end support after temporarily violating higher 1.4000-1.4100 serial resistances. While that all looked like a reversal of the previous US dollar up trend, in fact is each case the extremes that were seen on the recent reaction were unexpectedly sharp tests of the overall trend channel resistance for the euro up that EUR/USD 1.4250, and US Dollar Index toward down into the .7500 area.

However, it is now obvious near-term trend management may make it necessary to temper any friendly sentiment toward the buck on two potential considerations. The first is if the equities actually maintain their overall strength instead of the December S&P 500 future capitulating back below 1,240. The second is that even if equities weaken, any influence there based upon the failure of the US Congressional Fiscal Reform Super Committee to produce a constructive result might be negative for the US dollar as well. Which is exactly why we have favored the govvies over the greenback in our recent trend views.

There are also extended technical factors which left both EUR/USD and the US Dollar Index at their next critical trend thresholds after yesterday’s swing. [The same is also true for the trend of the US dollar against most other currencies.] The US Dollar Index has classically had problems with the mid-upper .7800 area that it neared earlier today, and even more pointedly EUR/USD sagged into the 1.3500-1.3460 range. Much below more critical support in the 1.3400-1.3360 area (both historic and recent congestion) there isn’t anything at all until the mid-1.3100 area, with the more prominent supports at 1.3000 in the 1.2860 levels.

Crude Oil and Gold: That ‘risk-on’ psychology is also why December Crude Oil future might remain above the 95.00 resistance it pushed up through earlier this week. It seems it will take quite a failure from equities to dent the buoyant energy market psychology. Next significant resistances are in the 99.58-100.00 and 102.50  areas.

December Gold future might remain strong on the entire different psychology. It seems that Gold and mainstream commodities have parted ways once again to some degree due to disarray in the global financial market restoring a ‘haven’ bid to the yellow metal. Back above the old August 1,682-92 Runaway Gap and pushing above the 1,750 resistance and 1,771-75 clearly restored its haven bid. All of which would seem to indicate it is once again beginning to reflect potential for central banks’ continued liquidity infusions to further dilute the value and credibility of fiat currencies. The interim resistance in the low 1,800 area could now easily be overrun on the way to more prominent levels in the mid-1,800s if that 1,750 area support holds.

Thanks for your interest.

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