Weekly Recap & Outlook – 12.31.10

Tower Private Advisors

Below

  • Another year in the bag
  • Fabulous contest
  • Good economic releases this week

Capital Markets Recap

While most of the indexes above capped the year with weekly gains there were some spots of weakness, and there was a pretty sharp jump in the Volatility Index (up 10%+).  That’s not encouraging, as it means option traders, by their trading this week, are implying higher odds of increased volatility for the next 30 days.  Admittedly, the index, itself, is at relatively low levels.

Here’s a look at 2010 performance for all a wide spectrum of futures contracts.  It wasn’t a bad year for stocks, but it was a great year for other commodities (Palladium up 95.6%, Cotton up 91.5%)

Top Stories

Not a lot of market moving stories this week, although one caught my attention, U.S. Stock Funds see First Weekly Inflow Since April.  May was the month of the so-called Flash Crash, and that day of momentary liquidity vacuums is said to have shaken investor confidence in market, so the drying up of equity funds isn’t surprising.  Nor, frankly, is the one-week inflow.  This month marks the best December since 1999 [strike up the Jaws theme music], a Santa Claus rally is underway, and everyone knows, by now, that the third year of a President’s first term is the best one for stocks.  I see this playing out in one of two ways but ending up with the same result.  My guess is it’s a two-way decision tree, as imagined below (click to enlarge.)  Please note that, as usual, I have not consulted with my learned colleagues on this idea, and, indeed, it is contrary to the view that most CNBC-types seem to have expressed for the coming year.

That and 50¢ will get you the proverbial cup of coffee.  What’s more, you’re not likely to remember if it turns out right or wrong.  So, why don’t you give it a go, yourself?  Guess what the Dow Jones Industrial Average will be at the end of January–as goes January, so goes the year.  It closed today at 11,577.51.  If you’re closest amongst the guessers, I’ll send you an Amazon.com gift card via e-mail.  You have to give me your guess by next Friday, January 7.  Click the image below to send me an e-mail with your guess.

$$  DumbFabulous  Contest  $$

One last thing on markets, here’s my as-objective-as-I-can-be view of the things going for and against stocks.

This Week

This was a pretty quiet week on the economics front . . . a couple of housing data points, the weekly unemployment claims figures, and some regional activity indicators.

The story in housing, whether from the talking heads or the economic series, is still the same:  sluggish activity and prices going nowhere.  The CaseShiller index for October–this for the smaller, 20-metro area report–was weaker than expected (-1% vs. -0.6%), and the year-over-year change dropped into negative territory (-0.80%) versus the September’s +0.59% year-over-year increase.  Pending Home Sales rose by 3.5%, which was better than what economists had guessed (+0.8%), but worse than the 10.1% moon shot in October.  On a year-over-year basis, sales are up by 3.5%, which, due to the beauty/curse of moving averages (i.e. one month drops off, one goes on), was a huge improvement over October’s -22.6% 12-month pace.

Initial Jobless Claims fell below the magical 400,000 level for the first time since mid-2008, which is to say, at pre-freakout level.  It used to be that 400,000 was the demarcation line between a contracting and expanding jobs picture.  I’m guessing no one cares now.  I few weeks ago I featured a traditional technical analysis of–not an investment, but jobless claims.  I suggested that with initial jobless breaking out of a consolidation, 384 was the target level for the breakout.  Judging by the chart, I’d say that wasn’t too bad.  With that good luck I won’t be making any more 2010 predictions.  Suffice it to say that layoffs are ebbing, while hiring remains below the labor force growth rate.

Three regional activity reports were released this week

  • Dallas Federal Reserve Manufacturing Activity index
  • Richmond Federal Reserve Manufacturing Activity index
  • Chicago Purchasing Managers Index
  • Milwaukee Purchasing Managers Index

All four showed improvement over recent results, although the first two remain below 2010 highs.  The Chicago Purchasing Managers Index is, however, RIPPING higher.  It’s at its highest level since at least 1994, and its supported by moves higher

in all of the component indexes.  The chart above is the headline index itself, and I don’t believe we’ve seen any economic indicators that look like this.  The concept of confirmation has been discussed in past missives, but in short it refers to the notion of things moving together.  For example, in Dow Theory the Dow Transports should be confirmed by movement in the Dow Industrials index.  In like fashion, for now, the big high in the Chicago PMI is just that, one lone high in one index.  Confirmation by other indicators is needed to suggest that strength in the Chicago area manufacturing area is something bigger.

Here’s a look at the component indexes of the Chicago Purchasing Managers Index.  I didn’t look at each to make sure that they’re all close to highs, but improvement over last month’s data is seen in each.

Next Week

In contrast to this week, next week’s a big one, as is any week when payroll figures are released.  Every so often the most-critical, must-know indicator changes.  In past decades it was the money supply or the Federal Funds Target rate.  Now, it’s payrolls-squared.

Key indicators to watch

  • ISM Manufacturing (Monday) – December
  • Factory Orders (Tuesday) – November
  • FOMC meeting minutes (Tuesday) – December 14 meeting
  • Initial Jobless Claims (Thursday) – weekly
  • Nonfarm Payrolls (Friday) – December
  • Unemployment Rate (Friday) – December

Others

  • Challenger Announced Job Cuts (Wednesday) – December
  • ADP Employment Change report (Wednesday) – December

I hope your 2011 is a prosperous and healthy one.  As always, thanks for reading.

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

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