Sunday, December 17, 2006

Strong Start on Friday Fades

On the eve of another Monday trading session, we look back on the Friday options expiration for some clues as to this week’s trading.  Just before the market opened on Friday, the Labor Department let us know that the inflation at the consumer level remained unchanged for November.  This news was greeted with what you might think, buying, both stocks and bonds.

With consumer prices remaining level, the market interpreted this to mean that the Fed could now stop this silly notion that they may need to raise rates.  With “core” CPI over the last year dropping to its lowest level since June, the market felt confident that the Fed surely could start lowering rates again sometime soon.  

We have been saying the Fed Can’t raise rates for the time being which means we have to agree with the market—it does pain us contrarians so—but we don’t believe the market should be going up because of it.  There does seem to be no one at the wheel at the moment but that’s an old story.  

As trading began, stocks and bonds opened on what would turn out to be the high of the day.  Yes, for stocks the Dow was trading in record territory while the NASDAQ indexes were lagging behind.  Shortly after the opening bell, both stocks and bonds fell for the better part of the day but stopping short of going into the red.  Volume was heavy as we suggested in last week’s post but it was mostly due to the unwinding of those derivative positions in options and futures.  

All in all it must have been a frustrating day to both bulls and bears.  As we surveyed the market over the course of the day, there didn’t seem to be much of a theme.  Some stocks performed better than others, so what else is new.  In the headlines this evening we note an article speculating that the market can go higher, as CNN said “Wall Street looks primed to rack up another strong week, into the new year unless some bad news would occur to stop it.  Well, that’s what makes a market—differing opinions, fear and greed, confidence and deception.  We here at the Update think the market is in a tremendous confidence game at the moment and recommend extreme caution.  

As for the coming week, there seems to be little impetus from the standard economic news to make a case for any real big moves in the market but the bullish undertone is still prevalent.  This is a bearish thing in our mind and as we look at the VIX making new multiyear lows there does seem to be very little in the way of fear and a lot in the way of complacency.  Let’s see how Monday trades after this expiration and then we’ll know more about the future course of the market.

Dow Industrials:  12,445.52  +28.76  (another world record close)
VIX: 10.05  (barely back above 10)
QQQQ:  44.43  (no new high here)
RYVNX:   16.79
RYAIX:  21.39
RYCWX:  35.49
TLT:  89.73
BEGBX:  14.06 (dollar is still rising)

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