Tuesday, December 26, 2006

12/26/2006 Morning Market Comment

I took a complete day off from the markets yesterday to enjoy the holiday with the family and to cook the Christmas dinner, which if I do say so myself actually came out pretty tasty, and no one to my knowledge is suffering from e-coli this morning!

Geopolitical events are having the biggest impact on the price movements of gold and crude oil. Gold has been up as much as $10 and crude as much as nearly $1 on the latest round of tensions between Iran and the UN. Crude also got a lift from ongoing unrest in lovely Nigeria. While the sabre rattling goes on between Amhadinejad and the UN, it been interesting to watch the internal political developments within Iran, though most analysts, including the Stratfor people, think that while the average Iranian is unhappy about standards of living, Iranian foreign policy is not about to change since power in the Iranian Assembly is more symbolic and supportive of Ayatollah Ali Khamenei. My entry for gold still remains at above a close of $632... so close, but not yet.

This is a big vacation week for the movers and shakers on Broad and Wall, so almost needless to say, the trading volume will be thin as 2006 comes to a close. But even as junior traders man the desks and floor posts, there will some economic data that may move the markets:

The most important piece of economic data comes this Thursday: the Chicago PMI. Last month, you'll recall, the index of manufacturing in Chicago-land fell to 49.9 in a big surprise to many. The drop brought on talk of a coming recession. Economists are forecasting a slight December rebound back above the expansion line to 50.1%. Incidentally, Marketwatch columnist Mark Hulbert used the "R" word in his column, and not to scoff on the notion of one, but to suggest that IT might be on the horizon: (Click Here).

Other data due out this week: On Wednesday, new home sales are expected at a 1.02 million in annual seasonally adjusted rate compared to 1.004 million in October. On Thursday we'll get figures on consumer confidence and existing home sales. It is conceivable to think that we may see a near term plateau in home sales, but c'mon now, this talk in the mainstream media that housing has already bottom is completely ridiculous! The housing market really fell off a cliff only last summer - so they expect us to believe that the crunch is over only after about 8 months?? I don't think so, since the housing woes are really part of the larger phenomenon of the popping of the Greenpsan 'credit bubble'. This is going to take time to work out, folks.

So it looks like a rebound attempt will try to take hold, but with the VIX surging above 11 on Friday, it will need to be watched closely along with all the usual suspects (breadth, put to call, ticks, etc) for latent strength, or weakness. The chart below clearly shows that SPX has found support at about its 1 month moving average - something I've called the "lower end of its bullish channel".

The 1405 area remains an important area of support for the bulls. At least they've got history on their side since the Santa Claus rally has often extended into the final trading week of the year. But if that 1405 area is broken, it may signal the start of a break and a confirmation of other bearish signals that have been mentioned here in the blog.

My trading activity this week is going to be very limited since volume will be thin in most markets, but I am positioning for a variety of interesting plays in the New Year. I'll have more on that as the time draws closer.

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