Last week’s stock results were poor for nearly all funds and sectors. Will this continue? Until Wednesday, we can expect a continuing focus on the Fed. After that announcement we may see a change in tone: Pundits will be asking:

Is it finally time for the Santa Claus Rally?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted that the market stories for the week would emphasize the Fed. The general idea was to examine the avalanche of economic data with special attention to possible impact on the upcoming Fed decision. This was a pretty lucky guess, since there has been plenty of pre-Fed meeting commentary sprinkled into the discussion of economic data. My vacation week ended as a market neutral, despite some wild swings. My return on Monday was just in time for a really bad market week featuring Friday’s decline. To get the full story, let us look at Doug Short’s weekly chart. Doug’s full post shows the various relevant moving averages in a very negative week for stocks. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).

Doug’s update also provides multi-year context. See his World Markets Weekend Update for more excellent charts and analysis.

The punditry must find an explanation for any market move. Declining oil prices continued as the prime candidate, although others nominated tax-loss selling and the Third Century decision to close redemptions in a bond fund (See “The Ugly” below). Will these effects carry over to next week?

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

The long-awaited change in Fed policy is scheduled to be announced on Wednesday. While most expect a drawn-out process of “normalizing” rates, it represents an important psychological change. No one really knows what the initial reaction will be. The decision is widely anticipated – so much so that many expect a stock market decline if there is no change. A popular analogy cites Lucy, a football, and a hapless kicker!

What will happen with the Fed decision behind us? Regardless of the first reaction, the next matter for discussion will be the potential for a Santa Claus Rally.

People will be asking:

Is it finally time for a Santa Claus Rally?

Expect to hear a range of viewpoints:

  • No way! Recent selling proves the start of a bear market.
  • Maybe. It depends upon whether oil prices stabilize.
  • Maybe. It depends upon the dollar.
  • Yes. Seasonal strength and the end of tax loss selling will be the key drivers.

    • As always, I have an opinion in the conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

    Last Week’s Data

    Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  • The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  • It is better than expectations.

    • The Good

    There was a little good news, but most results were in line with expectations.

  • Small business sentiment has flattened according to the Thumbtack survey. Check out the explanations and charts from this relatively new (three-year) survey of 18,000 small business owners.
  • Gas prices declined below $2. New Deal Democrat has the round-up. (I filled up last week at $1.83).
  • Mortgage applications are showing strength. These are new loans, not refinancing. Scott Grannis explains why this is an important story for the economy and construction. He notes that both borrowing and lending are (finally) moving higher. (The earlier spike is an artifact of bank reporting requirements).

  • Michigan sentiment eked out a small gain. This was mostly in line with expectations, but a bit stronger than most economic indicators. Doug Short shows the history of this data series as well as the corresponding economic results.

  • Retail sales increased, especially on the “core” items. This was either good or bad, based upon whether you looked at the headline or core numbers. Steven Hansen was not impressed with either, doing his expected deep dive into the data.

    • The Bad

    Some of the economic data was disappointing.

  • Initial jobless claims edged higher. Calculated Risk has both charts and analysis.
  • Calculated Risk has both charts and analysis.New Deal Democrat).
  • Business inventories were flat. This missed expectations for a gain, and will have a small impact on Q4 GDP. Steven Hansen analyzes the impact on overall sales and explains why this indicator is important.
  • Technical support has been broken. Josh Brown illustrates with this chart (but see today’s conclusion as well).
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