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Deal Enthusiam Fading

 December 26, 2012 01:51 PM


The market had been running higher into last week on what seemed like optimism that Congress would get something done to avoid the fiscal cliff.  With 3 days left on the calendar in 2012, that optimism is fading into pessimism.  The market opened on a flat note this morning, but has since started to fade into negative territory.

So far, materials stocks are outperforming while consumer discretionary stocks are really lagging.  The early reports for holiday sales don't seem as robust as hoped for.  I heard that McDonald's was even urging franchisees to remain open for Christmas to help boost Q4 sales.

In economic news, the Case-Shiller Home Price Index rose 4.3% in October, a strong showing on top of the previous month's reading of 3.0%.

[Related -Buffett's Market Indicator Flashes Red, Prepare To Sell]

Asian markets were up across the board overnight.  Japan's new prime minister has promised unlimited money printing to end Japan's bout with deflation.  Japan led the action with a +1.5% gain. 

The dollar is lower vs. the euro and that is boosting commodities.  Gold prices are up only slightly near $1662, but oil prices are back above the $90 level near $90.77.

The 10-year yield is a little lower after last week's spike higher and trading near 1.74%. 

Volatility expectations are picking up with the VIX spiking +8.5% so far up to the 19.35 level.  The VIX has had a hard time maintaining these big spikes into the close.  Let's see if this early spike in volatility fades into the close today.

Trading comment: The Nasdaq 100 has fallen back below its 50-day average support.  And the S&P 500 is only 6 points away from testing its 50-day average.  It still feels to us like the time to be getting more conservative in our asset allocations.  The recent lift in the markets into mid-December may prove to be just a lift that offered investors better price levels to trim equities heading into the near year.  For us to be wrong, the markets would have to shoot higher as we enter 2013.  While anything is possible, we view the odds of such an outcome as relatively low given the headwinds and economic backdrop the market is facing.

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