Market Comment - December 14

(Marco Bonelli) Do we already see (the not so pleasant) realities kick in?

Hope, a change in perception or climbing the famous wall of worry -as we have seen over the last two weeks-, only works out if the underlying base leaves room for it. In other words, a few better than expected economic numbers or some favorable decisions by the central banks definitely left room for hope and negative news easily got brushed off while only positive news counted.


Yesterday however appeared to be that the underlying base looks a bit different than investors thought: Much weaker than expected November retail sales (and BBY's disappointing Q3 results added to that); GE sounded more cautiously regarding their outlook; direction-less discussions about funding of the ESM; re-emerging issues around debt restructuring in Greece (whose financial situation seems to deteriorate by the minute); never-ending concerns about credit rating downgrades for France and other countries; the Euro dropping close to the lows from beginning of October; tensions in the Mid-East and finally the FOMC that also mentioned that fixed investment from businesses (the main driver behind the stronger Q3 GDP growth) is growing "less rapidly" - all that makes it more difficult to be hopeful and ignore the negative!

By the way, the retail sales statistic was the third data below expectations, following disappointing October Factory Orders and November ISM Non-Manufacturing data, both reported beginning of last week. Finally, a better than expected Spanish bond auction yesterday was quickly offset by a rather disappointing auction in Italy this morning and the latest economic data out of China show a sharp deceleration in money-supply, suggesting a continued cooling down of business activity - in summary there is seems to be less and less good news to base hopes on and more and more bad news to ignore in order for the year-end rally to materialize!

For the rest of the week, the market might be torn between two themes: On the one hand, a string of economic data tomorrow (PPI, Industrial Production, Jobless Claims, Empire Fed and Philadelphia Fed Index, among others) will give more answers if investors can stay hopeful or if prospects of a year-end rally can be flushed down the drain. On the other hand, quadruple option and future expiration on Friday tends to keep major indexes around key chart levels, levels at which the market currently trades at. The second time in two weeks, the major averages dropped back to the highs of the August-September trading range, in fact, most indexes closed slightly below their September highs. Talking about key levels, 1230.50 in the SPX, 2600 in the Nasdaq Composite and 2268 but also 2300 in the NDX are important levels to watch. Other indexes like the Russell 2000, the S&P Midcap Index or the ValueLine Index already trade well within their August-September range.

Lacking any other major news and although European markets and futures indicate further weakness, the US markets may attempt to trade back up to the mentioned key levels and move slightly higher during the trading session which could be helped by a technical rebound in the Euro, if it occurs to happen. Nevertheless it continues to make sense to stay cautious as the outlook seems to deteriorate - once again!

Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own)