John Bougearel
The stock market as measured by the SP500 has languished since the Dec 11 FOMC meeting because it did nothing to relieve heightened pressures in the money markets.
But finally, as of this morning, the freeze in three out of four key money markets beginning to thaw this morning (see report on spreads narrowing this morning). Additionally pressuring equity markets this past week were stocks in the financial sector reporting earnings. Investors can probably toss aside earnings risks until the second half of January, and their concerns in the money markets are apt to diminish as long as the credit spreads begin to narrow. All told, as the SP500 enters oversold conditions on the daily charts, the near term risks may be shifting to the upside for investors. So, maybe there really is a Santa Claus after all.
December 18th One Year Anniversary Kiss
A year ago, the SP 500 topped at 1444. On December 18th this year, the SP500 kissed 1444 with its plunge to 1437. Since then, the stock marketbounced back to its Q1 07 High at 1465, but has yet to trade above 1465 all week long. For the moment, last years high at 1444 is acting as a floor this week, while the Q1 high is acting as a ceiling. A breach of the ceiling at 1465 would be a bullish indication near term, and likewise, a print below 1444 would be bearish near term but with diminished downside risks for reasons cited above.
Oh, and btw, the March 08 SP500 contract trading at 1466 as I write will roll onto the continuation chart posted below. The ten point premium accorded the March contract implies the continuation chart could gap above resistance shown at 1465 tomorrow!
*** Author’s Postscript footnote
Atlantic City film - This gap up on the Dec option expiry is reminiscent of 1996-1998 and 1999. Those years all gapped up at least one percent. 1999 and today gapped up 1.5^. a seasonal rally ensued into the 1st half of January in 1999 and 2000. In 1996, the rally extended into late Feb b4 a pause.
There is no reason for this not to for this rally not to extend into the first half of January, but with financials in an earnings recession, don’t expect much good news after Jan 15. That said, in 1999-2000, the xmas rally traded 3.1% higher by Jan 3 2000 from the December contract expiry high. In 1998-1999, the stock market traded 7.3% higher by Jan 8 1999 from the December contract expiry high. In 1996-1997, the market traded 7% higher by Feb 19 1997 from the December 96 contract expiry high.
Just 3% above today’s December contract expiry high would project the sP500 to 1542, and 7% above today’s December contract expiry high would project the SP500 to 1602. Investor angst over Q4 earnings can largely be ignored for another 3 weeks because much of the downward Q4 earnings guidance is already in place and discounted into the market, so who knows how high the market will go between now and earnings season when angst might resurface.John Bougearel
Event-Driven Investment Research
Director of Futures and Equity Research at Structural
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