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Stock Market Outlook for December 13, 2010

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  The Markets
Market Close % Change Expected ST Low Expected ST High
Dow Jones Industrial Average (^DJI) 11,410.32 0.35% 11,050.66 11,392.95
Dow Jones Transportation Average (^DJT) 5,099.38 0.31% 4,778.39 5,052.89
Dow Jones Utility Average (^DJU) 397.39 0.49% 393.33 406.82
S&P 500 (^GSPC) 1,240.40 0.60% 1,182.82 1,227.84
S&P/TSE Composite (^GSPTSE) 13,239.47 0.55% 12,642.45 13,183.99
NASDAQ Composite (^IXIC) 2,637.54 0.80% 2,495.84 2,602.89
Austrian Traded Index (^ATX) 2,829.99 -0.24% 2,654.21 2,784.95
French CAC 40 (^FCHI) 3,857.35 -0.02% 3,686.91 3,903.47
German DAX (^GDAXI) 7,006.17 0.60% 6,674.02 6,963.45
UK FTSE 100 (^FTSE) 5,813.00 0.09% 5,616.24 5,845.76
Swiss Market Index (^SSMI) 6,519.10 -0.28% 6,408.48 6,586.55
Brazilian IBOVESPA (^BVSP) 68,342.00 0.68% 68,139.10 72,140.26
Mexico’s IPC (^MXX) 37,677.78 0.29% 35,717.92 37,596.47
Amsterdam Exchange Index (^AEX) 350.21 0.24% 333.81 347.78
Shanghai – SSE Composite Index (000001.ss) 2,841.04 1.07% 2,829.97 3,112.83
New Zealand NZX 50 INDEX GROSS (^NZ50) 3,272.92 -0.23% 3,266.01 3,327.81
China HANG SENG INDEX (^HSI) 23,162.91 -0.04% 23,046.22 24,642.45
Korea KOSPI Composite Index (^KS11) 1,986.14 -0.14% 1,900.70 1,966.46
Tokyo NIKKEI 225 (^N225) 10,211.95 -0.72% 9,358.08 10,210.21
Click to enlarge

Markets were lifted by further optimism on Friday, stemming from stronger than expected economic reports and a dividend boost by a blue-chip stock.   A slimmer than expected trade deficit and better than expected consumer sentiment were among the factors that pushed key indices to new 2-year high levels, including the Dow Jones Industrial Average, the last of the major indices to do so.   The market is beginning to fire on all cylinders and confidence is clearly spreading, both from investors and corporations.   Just on Friday General Electric announced its second dividend increase in a year.   The increase amounted to two cents per share or 17%.   The stock gained 3.44% in what is commonly the best performing month for the equity on a seasonal basis.   Strong positive tendencies subside following the conclusion of the calendar year, but find another period of seasonal strength beginning in March.

Despite much speculation at the end of last week that China would enact further monetary tightening measures by way of an interest rate increase, events over the weekend suggests otherwise.   On Sunday, China’s leaders pledged to stabilize prices in 2011, but restrained from mentioning any rate increases in the short-term.   The result of China’s economic meeting was that uncertainty is maintained as to when rates eventually will be pushed higher in order to thwart excessive inflation.  The CSI 300 Index is reacting favourably to the non-action, posting gains topping 3% and breaking out of a trading range that has persisted for the past month.   Speculation of the increase in lending rates kept pressure on various commodities over the last few sessions, however the subsidence of this market overhang should now allow these materials to move more freely, for now.      Commodities that see positive seasonal tendencies commence in the short-term include Platinum, Wheat, Cotton, and Corn.

We’re approaching the period in the month that seasonal tendencies customarily get a boost going into year-end as investors seek to position portfolios for the year ahead.   Upside potential for next year looks to be substantial with returns expected to range between 15% to 20%.   Window dressing of institutional funds around this timeframe is anther significant factor of the boost in equity prices in the last half of the month.   Tax-related selling usually brings equity values lower in the first half of the month, a scenario which has not occurred this year due to optimistic prospects of the passing of the extension to Bush-era tax cuts.   This essentially means that a large selloff to mitigate higher tax rates will not occur, but as long as rates are not 0% the possibility of tax related selling, to some degree, remains.   With technicals screaming overbought signals yet again, a huge question mark remains as to how much upside potential remains by the time the countdown begins on New Year’s Eve.   For now the trend remains up, and even just for the long-term potential, appropriate equity positioning is prudent.   The last half of December is seasonally a strong time for the market as we enter January, which is commonly a weaker month.   Pre-election years in the presidential election cycle, as will be the case in 2011, refute this claim of a weak January, however.   Therefore data both for and against a strong upward trend over the next 7-weeks exits, leaving technicals as the deciding factor to be in or out.

Sentiment on Friday remains to the bullish side of the equation with the put/call ratio ending the day at 0.76.   The 10-day moving average of this ratio, now at 0.80, was last witnessed at the April highs before the market plunged over 15% in about two months.  This is not expected to be the case again.   What the current bullish sentiment is indicating is that investors have become complacent at current levels, leaving the market vulnerable to “shocks”.   Appropriate put protection positioning remains a prudent course of action in order to mitigate short-term fluctuations.   Any weakness presented over the next seven weeks offers opportunities to increase equity exposure in economically sensitive areas, such as materials and industrials.

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  Sectors that Moved the Market
Sector % Price Change % Volume Change
Energy Sector (NYSEARCA:XLE) 0.41% -20.78%
Basic Materials Sector (NYSEARCA:XLB) 0.87% -54.68%
Financial Sector (NYSEARCA:XLF) 0.90% -27.15%
Health Care Sector (NYSEARCA:XLV) 0.97% 56.12%
Consumer Discretionary Sector (NYSEARCA:XLY) 0.35% 0.22%
Industrials Sector (NYSEARCA:XLI) 0.91% -13.96%
Technology Sector (NYSEARCA:XLK) 0.48% -6.65%
Utilities Sector (NYSEARCA:XLU) 0.39% -29.86%
Consumer Staples Sector (NYSEARCA:XLP) 0.17% -15.81%
Click to enlarge

 

In conjunction with GE’s announcement to increase its dividend payout rate, Health Care, Industrials and Finanicals posted returns topping nine-tenths of a percent for the day.   Each sector sees strongly positive seasonal tendencies in the last half of December.   One of the areas of the market that is expected to do well over the next couple of months are small-cap stocks.   The extension of the Bush-era tax cuts is expected to benefit companies that receive revenues predominantly in the US.   Small-caps have a clear advantage over major multinational corporations commonly found in large-cap indices.   Therefore look for small caps to outperform large cap stocks as the US economy expands in the year to come.

  S&P 500 Index

image

Chart Courtesy of StockCharts.com

Support 2 Support 1 Pivot Point Resistance 1 Resistance 2
1229.97 1235.19 1237.79 1243.01 1245.61
Click to enlarge

image

 

Total Returns

Yesterday: 0.60%  –  Trailing 5 days: 1.28%  –  Trailing 30 days: 1.78%

Averages for current day based on past 20 years of data

  • Current Day: –0.05% with 57.14% of sessions gaining
  • Next 7 days: 0.13% with 51.00% of sessions gaining (Max return: 1.12% by December 15 on Average)
  • Next 30 days: 1.22% with 54.85% of sessions gaining (Max return: 3.24% by December 30 on Average)
  TSE Composite

image

Chart Courtesy of StockCharts.com

Support 2 Support 1 Pivot Point Resistance 1 Resistance 2
13132.23 13185.85 13219.64 13273.26 13307.05
Click to enlarge

image

 

Total Returns

Yesterday: 0.55%  –  Trailing 5 days: 0.58%  –  Trailing 30 days: 2.29%

Averages for current day based on past 10 years of data

  • Current Day: –0.53% with 50.00% of sessions gaining
  • Next 7 days: –0.63% with 41.50% of sessions gaining (Max return: 0.80% by December 16 on Average)
  • Next 30 days: 1.57% with 52.57% of sessions gaining (Max return:3.63% by December 31 on Average)



Disclosure: I am long GE.

Additional disclosure: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.Don and Jon Vialoux are research analysts for JovInvestment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of JovInvestment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by JovInvestment Management Inc