Santa rally may face test next week

From Reuters
Get ready. The last trading week of the year will be a test for stocks to prove whether they have the strength to carry a rally into next year.
The broad S&P 500 index broke through its 200-day moving average on Friday after turning positive for the year as a four-day rally lifted stocks following a spell of better-than-expected economic data. At Friday’s close, the S&P 500 was up 0.6 percent for the year.
But despite the recent economic data that suggest the U.S. economy is on the right track to recovery, Europe’s sovereign debt crisis is troubling investors and weighing on the market.
Many market participants are reluctant to believe in a “Santa Claus rally” this year, which refers to stocks’ seasonal tendency to gain in the final five trading days of the year and first two trading days of the new year.
Warnings from major credit rating agencies on a potential downgrade of several European nations have kept investors on edge. After Standard & Poor’s surprised financial markets back in August with a downgrade of the United States’ triple-A credit rating on a Friday evening, investors worry a similar move could come at any time - even between Christmas and New Year’s.
But the absence of European sovereign bond auctions for the next two weeks could lend support to stocks.
“The fact that there won’t be a (European) bond auction until the second week of January, that takes away some spotlight from Europe, at least for a little while,” TD Ameritrade chief derivatives strategist J.J. Kinahan said.
“Unless we get earth-shattering news, the S&P could go up to (the) 1,300 levels,” he said.
The S&P 500 closed on Friday at 1,265.33.
The correlation between U.S. stocks and European sovereign bond yields has been high, especially the link with Spanish, Italian and German bonds. A poor bond auction in any one of these countries could trigger an instant selloff in the U.S. stock market.
What happens next week is important as it sets a tone for the coming year.
“If Santa should fail to call, bears may come to Broad & Wall,” so goes the Wall Street adage, according to the Stock Trader’s Almanac.
Ari Wald, a technical strategist at Brown Brothers Harriman, said the key level on the S&P 500 to watch is 1,260, which is a resistance from the index’s downward sloping 200-day moving average and the downtrend connecting its October and December peaks.
“A breakout above this supply would argue for continued seasonal strength through the first quarter of 2012,” he said.
He also noted that 1,200 is support from the index’s downward sloping 100-day moving average and the uptrend connecting its October & November lows.
“A breach of this demand could stir additional technical selling to 1,130-1,150 intermediate-term support,” Wald said.
With many investors absent until the start of 2012, trading volume is expected to be light, creating more volatility.
Next week’s data includes the S&P 500 Case-Shiller House Price Index and consumer confidence data on Tuesday.
The Chicago Purchasing Managers Index and pending home sales data are due on Thursday. After a strong gain in November, the Chicago index is seen giving back a modest amount in December.

Asian shares up as US data spur year-end bounce

From Reuters
Asian stocks rose more than 1 percent and U.S. index futures also gained on Friday, as signs of a strengthening economy in the United States encouraged a year-end bounce for riskier assets.
European shares were also expected to open higher, helped by a 0.5 percent rise in S&P 500 index futures that pointed to further gains when U.S. trading resumes.
Wall Street stocks had risen for a third straight day on Thursday, leaving the S&P 500 index virtually flat for the year, after data showed new claims for unemployment benefit dropped to their lowest in 3-1/2 years.
The euro crept higher, but remained subdued amid doubts over whether this week’s European Central Bank tender of cheap loans will be effective enough to ease the financial strain on troubled euro zone economies.
“The highlight is the continuation of good data on the U.S. economy. China also seems to have managed to orchestrate a soft landing...,” said Ben Le Brun, market analyst with OptionsXpress in Sydney. “The problem child is still Europe.”
MSCI’s broadest index of Asia Pacific shares outside Japan rose 1.2 percent, with Australian and Korean shares both rising more than 1 percent . Tokyo’s financial markets were closed for a holiday.
Spreadbetters called London’s FTSE to open up 0.6 percent, Frankfurt’s DAX up 0.9 percent, and Paris’ CAC-40 up 1 percent.
Asian share markets, both developed and emerging, have sharply underperformed U.S. stocks in 2011, with the MSCI Asia ex-Japan losing 17 percent, and the Nikkei share average down about 18 percent, while Australia’s benchmark has lost about 13 percent. The MSCI World index fared slightly better, losing only 10 percent this year.
Citigroup equity strategists said in a note that Asia had seen its worst December fund outflows in 20 years as investors continued to pull money out of global equity funds.
The euro crawled up to around $1.3067, from $1.3050 late in New York, in thin trade.
The ECB’s first ever tender of ultra-cheap three-year loans on Wednesday, which saw 523 banks gorge on a total of 489 billion euros, has failed to win the single currency much support.
But despite the long-running debt crisis, the euro is only down around 2.4 percent for the year, having found support from higher ECB interest rates in the first half of 2011 that pushed it to a year high near $1.50 in May.
“People are diversifying away from U.S. dollars and that’s what it comes down to,” said David Scutt, a trader at Arab Bank Australia in Sydney.
“Despite the fact the U.S. economy is strengthening, there are still expectations in the marketplace that the Fed has showed it’s very keen to print at the best of times, and that’s helping the likes of the euro.”
The U.S. Federal Reserve has kept interest rates near zero for more than three years and has signalled it will keep them there through at least mid-2013. It has also bought $2.3 trillion in long-term securities to push down borrowing costs.
The New Zealand dollar dipped briefly on news of another earthquake near Christchurch, but soon steadied as there were no reports of casualties or widespread damage, unlike the previous quake in February.
It was trading at $0.7745, up from $0.7724 late in New York.
The rosier picture painted by the U.S. data supported commodities, with copper, which is sensitive to expectations of industrial demand, rising 0.5 percent to $7,575 a tonne, on course for its first weekly gain in three weeks.
U.S. crude oil edged up slightly, drawing closer to $100 a barrel, while Brent crude was little changed just below $108.
Gold inched up 0.2 percent to around $1,609 an ounce.
The precious metal has shed more than $300 since racing to a record above $1,920 in September, an appreciation driven partly on fears that the Federal Reserve’s monetary easing steps would stoke inflation against which it has traditionally been seen as a hedge, but remains up around 13 percent on the year.