Santa comes to stock market party, but is the rally clock ticking?

Fibonacci Forecaster

I hope each and every one of you has a very blessed Christmas and New Year’s. I can’t believe another year has slipped by already. Let’s get to brass tacks.

This is important, so make sure you understand this: It has been our take that Bernanke keeps the stimulus in place because of the dysfunction in Washington. For the political system in this country to make a meaningful contribution to a successful economy, they need to have a good mix of monetary and fiscal policy. The best situations can be compared to a referee in sports; you never notice they are there. If the ref becomes the center of attention, chances are he’s making a bunch of bad calls. The problems develop when you notice something is obstructing the natural flow of things.

We’ve had to endure the political process not running smoothly at all for the past two years. That condition developed in 2011 on the first debt ceiling debacle. We don’t really need to dig into this as we’ve covered it probably a hundred times. Back in October when things looked really bad, I thought there was a possibility they could delay tapering well into 2014 because the dysfunction never looked worse.

OK, so the Obamacare rollout was a disaster and the GOP changed strategy. You know that as well. Now, both sides put through a budget without the usual histrionics. That materialized on Wednesday. Whether they made a big deal of it or not, I think it was a major factor in the Fed doing something now as opposed to a month from now when Bernanke retires and when I really thought they’d taper. Let’s just say the real easing was the dysfunction in Washington. Leading up to Wednesday they sold the taper. On Wednesday they bought the taper. This wasn’t your usual sell the rumor buy the news event because only part of the market found a low. The NQ found a new low near the Fed news while the Dow was already off the low and didn’t confirm to give us a bullish divergence. When you get a real sell the rumor event, they have enough fear come into the market that everything is on the downside.

The biggest news of all is by Friday the Nasdaq took out our 4100 level, which is an important Fibonacci technical level. It’s never a prediction that a market is going to turn at a certain Fibonacci level. What it means is we end up at a high probability inflection point where risk is extremely elevated simply because we’ve seen thousands of other legs terminate at the 161 level. We’ve seen so many, we don’t even need to back test. It either is, or it isn’t. If it does, we know why. If it doesn’t, that’s important as well because we know the market skipped a key guard at the gate and has the potential to go to 261. What passing 161 really means is the door opens to higher and potentially much higher levels. I doubt it means 5000 at this point. The Dow took 25 years to recover the 1929 high and we are only 13 years into this sequence.

So we, are over 4100? What does that mean? The first thing it means is they finally got the Santa rally going. But in terms of the technical level, it’s right on the cusp of taking out the margin of error. The high is 4111.93 with a chance to pop in the morning. It either reverses by the end of the first hour or there’s a very good chance the Nasdaq is not stopping at this level.

Now that we got the technical level out of the way, this really isn’t much of a taper, which is why the VIX dropped as they bought the news. Number one, the Senate signed off on the Paul Ryan budget as we discussed. That changed the landscape, but what’s $10 billion among friends? To the U.S. Treasury, that’s a drop in the bucket. We had mixed economic data last week with GDP better than anticipated as it was revised up, but existing home sales dropped 4.3%. What that means is the new Fed under Janet Yellen (she will be confirmed come January) reserves the right to not stair-step in case the economy slows again. Let’s keep in mind that while GDP is over 4% nearly 1.8% (it’s a little smaller) still comes from a buildup in inventory. Also housing starts reached their best levels since 1990 but nobody is really sure just how much of that has to do with optimistic builder sentiment. The truth of the matter is economic conditions are finally improving and they better be considering the market continues to power to new highs every month.

What should we expect this week? It’s the low volume part of the holiday season where the few can actually bully the few. We can see wide roller coaster swings and it’s also possible to get a high now that Christmas is here. The Santa rally season officially ends with Christmas because the euphoria usually pops right after people spend time with relatives they only see once or twice a year. Does Christmas make the heart grow fonder, or is it a case of out of sight out of mind? Let me put it to you this way. People tend to forget just how much they really do love their in-laws.

I have to be blunt about this because my job is stock market sentiment and something usually happens to that great feeling we all have right after Christmas. It does have an impact on stock market behavior. Those of you on a Caribbean cruise will maintain that euphoria through the New Year, but it doesn’t get accounted for in the market statistics.

Next page: A look at the chart

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