There are decades where nothing happens; and there are weeks where decades happen."― Vladimir Ilyich Lenin
This wasn't one of those weeks. It must be Groundhog Day as this week looked so much like last week. The only thing that really changed was that Fed Chair Powell confirmed the WSJ report from last Friday, in that, he is willing to support the stock market by backing off Quantitative Tightening (QT) and the draining of the balance sheet. This is a 180 degree shift on policy in just a few weeks and the injection of monetary heroin that spurred stocks since 2009 is seemingly making a comeback. Stocks reacted as you might think and rose another 1.8% on the week. It will be interesting to see if Powell and Gang return to the rostrum to talk markets back down.
"It's 'pretty obvious' the Fed is moving to the whims of the markets."- Art Cashin NYSE Floor Operations UBS
We said that the consolidation range that the market seemed to be in gave the advantage to the bulls. The bulls took the S&P 500 to a closing level of 2706 on Friday. We are now reaching the upper levels of where we thought that market would struggle. Next week could see more bulls come out of hiding after the trend following funds missed the Santa Claus rally. Gold and emerging markets had another great week as the US Dollar fell. We see more weakness for the almighty dollar ahead which should continue to support precious metals and emerging markets.
This is what we have been saying for the last couple of weeks and, like the movie Groundhog Day, we will repeat it again here.
We still think that there is a decent probability that the market runs back into the 2800 level on the S&P 500 before turning lower. The trend following funds will flip from short to long spurring the market higher. Hang on. 2740 may bring out big buyers according to Nomura Securities research….We think that the market runs into the 2800 level but aren't sticking around to find out.
Market history suggests that a retest of the Christmas Eve lows is preferred to show real concrete support in this market. Valuations are still historically high and markets are overbought. While market history tells us that markets should move lower, markets have a way of surprising us all. If central bankers keep pumping money into the system markets may just continue to rally.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.