Will Santa Show Up for Stock Market Investors?

U.S. equities, ETFs seek higher ground as December starts and investors wonder if Santa will show up for the traditional year end “Santa Rally”

U.S. equities and ETFs were mostly flat on Friday as November drew to a close.

For the week, the Dow Jones Industrial Average ETF (NYSEARCA:DIA) gained 0.1%, the S&P 500 (NYSEARCA:SPY) added o.5% for the week and the Nasdaq 100 ETF (NYSEARCA:QQQ) added 1.4% from last Friday’s close.  The Russell 2000 (NYSEARCA:IWM) also put in a good week with a gain of 2.1%.

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For November, the Dow Jones Industrial Average (NYSEARCA:DIA) declined 0.5%, the S&P 500 (NYSEARCA:SPY) gained 0.3% and the Nasdaq Composite (NYSEARCA:QQQ) added 1.1%.

On My ETF Radar

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In the chart of the S&P 500 (NYSEARCA:SPY) above, we can see how the index has reclaimed its 200 day moving average and broken through resistance at the 1400 level which has been a major battleground for the last few weeks.  Next major resistance levels are at the blue 50 day moving average and recent highs between 1430-1460, with the upper band just 3% from today’s levels.

The S&P 500 ETF (NYSEARCA:SPY) will have to break through these levels to reestablish its uptrend, however, the index has already reclaimed most of the ground lost since the beginning of the correction in early October.

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As we enter December, the topic of the seasonal “Santa Rally” comes into view and the fiscal cliff could put Santa in jeopardy this year which could be bad news for stocks and ETFs because as famed investor Yale Hirsch said, “if Santa fails to call, bears may come to Broad and Wall.”

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The fiscal cliff continues making daily headlines and we can expect more volatility and jousting around that subject during the upcoming week.  It was the  major topic of discussion on the Sunday talk shows as Treasury Secretary Timothy Geithner said tax increases for the top 2% of Americans were mandatory for a deal on the fiscal cliff.

Geithner said Republicans in Congress will be responsible for hurting the economy if they refuse to raise tax rates on the highest-income earners as part of a deal.  He challenged the Republicans to not raise taxes on most Americans to protect the top 2% and Speaker of the House John Boehner said negotiations were getting nowhere, describing the situation as a “stalemate.”

Most stock and ETF investors still expect a deal to be reached, however, both sides appear to be digging in around their sacred cow issues of tax hikes for the top 2% and government spending cuts, particularly in the area of entitlements.  So while big stock and ETF investors expect a settlement, clearly the chance of “going over the cliff” grows with each passing day.

President Obama is looking for more than $1.5 trillion in tax hikes, along with spending cuts, while Republicans are pushing for spending cuts in Social Security and Medicare, along with tax reform.

Farther down the road, lies another round of contentious negotiations over raising the debt ceiling which was an unhappy exercise in 2011 that resulted in setting the stage for this month’s fiscal cliff debate.

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Twenty nine days remain to the fiscal cliff, however, even more pressing is the fact that just 8 days are on the calendar when both houses of Congress are in session between now and the start of the Christmas recess on December 17th.

In other news, the European Union kicked the can farther down the road regarding Greece, giving the beleaguered island nation until 2020 to reduce its debt to 120% of GDP.  The country will try to buy back its own bonds starting on Monday, December 3rd, and so the “Greek Tragedy” continues with high unemployment and a severe recession.

Late Friday in little reported news, Moody’s downgraded the European Stability Mechanism and European Financial Stability Facility, the two  main bailout funds for Europe, and this could put more pressure on the Euro (NYSEARCA:FXE) which has recently been in rally mode.

In the United States, economic reports were mostly positive as Q3 GDP was revised upwards to 2.7% and the Richmond and Chicago PMI reports moved into expansion territory.  The housing market also posted some positive economic reports with the Case/Shiller Home Price Index rising, pending home sales up and consumer confidence gaining a fraction.

On the downside, jobless claims came in higher than expected and the Fed regions covering Dallas and Kansas City reported those regions in economic contraction.

Personal spending fell 0.2% in October, the first decline since last spring, and income was stagnant and still suffering the effects of Hurricane Sandy, while new home sales missed expectations.

Next week brings a storm of important data including ISM and construction spending on Monday, ADP employment and factory orders on Wednesday, weekly jobless claims on Thursday and the all important November Non Farm Payroll and Unemployment reports due Friday, all of which could move stocks and ETFs.

Bottom line:  Market participants appear to want to push major U.S. stocks and ETFs higher to close the year, however, going over the fiscal cliff could derail the widely anticipated Santa Rally.  

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John Nyaradi is the author of The ETF Investing Premium Newsletter.