With at least an interim “save” in Europe, will sleigh bells ring and Santa now come to town?
Last week was a nail biter as Europe dithered to the last moment and then came away with at least an interim “save” that could placate markets for awhile and set the stage for the traditional year end and widely hoped for “Santa Rally. Let’s take a look at the outlook for Santa, sleigh bells and the world as we head home for the Holidays.
On My Wall Street Radar
chart courtesy of stockcharts.com
In the chart above (click to enlarge), we can see how the S&P 500 (NYSEARCA: SPY) is now back up at major resistance levels.
A sustained break above 1260 would be required to confirm a new uptrend and say that Santa has a green light to come to town for Christmas. But things are looking more positive than before as major support held and the recent rally triggered a “low pole reversal” which is generally a harbinger of higher prices ahead. Should 1260 fall into the rear view mirror and then 1290, a strong year end rise to 1360 would not be unexpected.
The Economic View from 35,000 Feet
The news has been all Europe, (NYSEARCA: EFA) all the time, and with Friday’s at least partial settlement, markets could calm enough to set the stage for a rally at least into the New Year. The summit on Friday yielded mixed results as 17 states agreed to move to a closer Union but Britain opted out which wasn’t a particularly resounding affirmation of the deal. They also agreed to take short term steps to pony up 200 Billion Euro dollars in loans to the IMF to aid weaker countries and so that could be at least part of a short term fix to the credit crisis that just seems to keep on giving. However, make no mistake, Europe has a long way to go before this Grinch goes away.
So what about the Santa Claus Rally?
The Santa Rally is a widely known and widely debated phenomenom which says that the stock market will move higher around Christmas. Some of the best work in this field comes from my friend, Jeffrey Hirsch, at Stock Traders Almanac, which says that the traditional period for the Santa Rally is the last five trading days of December and the first two of the New Year when markets historically move significantly higher for periods dating back more than sixty years. Jeff also does a lot of work in seasonality which indicates that the current period is also the “six best months” of the year when most market gains tend to be seen and so this view would support the thesis that we’ll see Santa board his sleigh now that Europe has put in at least its interim save. But Jeffrey also says that if Santa is a no show this year it could be bad news for 2012 because, “If Santa Claus should fail to call; bears may come to Broad & Wall.”
For Jeff’s most recent article on the Santa Rally phenomenon, read “Yes, Jeff, There Will Be A Santa Claus Rally.”
What do other “predictive” indicators have to say about Santa and his sleigh?
“Dr. Copper,” (NYSEARCA: JJC) is widely viewed as a predictive indicator of economic activity due to its widespread use in building and industrial applications and the good doctor is now flashing multiple “buy” signals via various technical indicators.
Oil (NYSEARCA: USO) makes the world go ’round and “black gold” has made a significant rebound off its October lows and also has several “buy” signals in place with an upside point and figure target of $114/bbl.
Momentum in the U.S. Dollar (NYSEARCA: UUP) has turned negative, indicating that “safety” is not as important as it was as recently as late last week.
This week brings significant economic reports, particularly on Tuesday and Thursday, that people might actually pay attention to now that the European debt bomb has been defused for now. We’ll get retail sales and jobs reports on Tuesday, along with the monthly Federal Reserve meeting, and Thursday brings the weekly jobs reports, Empire State Index, industrial production and Philadelphia Fed reports, all of which could be market movers.
Bottom line for ETF and stock market investors: With the possibility of Europe moving to the back burner for the Holidays, favorable seasonality, improving fundamentals and potentially positive technical indicators, it does appear that Santa is loading his sleigh and that investors could find some Christmas cheer after a tough, volatile year. 2012 could be a very different story, but for now, I hear “sleigh bells ringing.”
Disclaimer: Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.