Weekly commentary on financial markets with emphasis on technical analysis and economic fundamentals

1. Well, I was wrong and right on events that happened this week in the market. I was wrong when I
stated that the Fed would not taper this week (they did by trimming 10 Billion off of their historic
quantitative easing) but I was right when I stated the Christmas rally would commence on
Wednesday afternoon right after the FOMC announcement. Here's a Five minute chart of the S&P
on Wednesday and Thursday:
(click on chart for larger image)
All the major indexes closed the week at either new all time highs are a fraction off of those highs.
For illustrative purposes here's a daily chart of the S&P 500:

2. (click on chart for larger image)
The S&P closed on Friday at 1818.32 and we still could reach my target of 1860 by year end. But
the market always gives us something to worry about and the long "wick" on Friday's candlestick
was representative of some selling pressure going into the close. I'll address why I think this is
happened below.
The Ten Year Treasury yield was quickly approaching 3% but backed off those levels on Friday
when, in my opinion, a stealth "flight to safety"occurred for reasons I'll explain below. I'm posting
a monthly chart of the Ten Year Treasury yield which shows the yield snagged on a resistance line
drawn from the highs in yield going back to 2007:
(click on chart for larger image)
In the post crash world we live, where we had a close brush with financial Armageddon and where
deflationary pressures still reign, there will be steady but diminishing downward pressure on
interest rates for years to come. Don't misunderstand, if the global economy is healing as well as
recent economic reports suggest, interest rates will rise but not at the clip many of us have become
accustomed to in our lives.
Gold was roundly trounced this week and is presently testing the crucial $1,200.00 level. Here's an
update of a weekly chart I've posted before:

3. (click on chart for larger image)
Gold needs to hold these levels if it's not going to see substantially lower prices. However, I am
mildly encouraged by the RSI (Relative Strength Indicator) momentum indicator in the top panel
which is sporting a positive divergence from price.
In a world awash in central bank liquidity Gold's price action is testimony to the incredible
deflationary forces that still persist in the global economy. The fact that interest rates have been
rising also does not help Gold's cause but I'm not of the opinion as many others are that rising
interest rates are the primary reason for the yellow metals persistent fall over the past few months.
We shall see what happens.
Now, here's one of the reasons why I think my prediction of 1860 on the S&P may not occur before
year end. The "spanner thrown into the engine" may be coming from China:
(click on chart for larger image)
The Shanghai Composite fell out of bed this week as the country's banking system experienced
another liquidity crunch. The People's Bank of China (PBoC) has been purposely draining liquidity
as it struggles to reign in it's "shadow banking" system. And this is all on the heels of one of the
larger coal concerns in the country, the Liansheng Group, defaulting on debts of nearly 30 billion
yuan this week. Evidently, the default caused the PBoC to inject some emergency liquidity into the
system on Thursday, only to reverse course on Friday by draining liquidity. Legendary short seller,
Jim Chanos, has been harping on the flaws and weaknesses in the Chinese banking system for years
and this recent development is worth watching going forward.
The market, for the most part, is taking this event in it's stride although I do believe some investors
took money off the table on Friday afternoon because of these developments. The Chinese banking
system went through a similar crisis earlier in the year and the prevailing view is that the PBoC is
doing what is necessary to address these twin issues of excess liquidity and multi billion Yuan
bankruptcies, however clumsy their implementation. To this I would not disagree but to say there
never seems to be a banking crisis until there is one and then it's too late.
Going forward, as our central bank begins it's historic liquidity unwind, if present market price
action is telling us anything it's telling us that the economy and financial markets no longer need

4. Fed "training wheels" to grow. Admittedly, the 10 billion reduction in asset purchases was a token
and the Fed was clear that it had the market's back by promising to keep short term rates low for
even a longer period of time than was previously promised. All I'll add is that there was no
specificity to those promises (and how could there be) but vague promises are easily broken.
Whether the S&P reaches 1860 by year end will depend much on the recent events in China which
I identified above but I must admit that even if those issues dissolve next week 40 points in five
trading days is a tall order and a positive catalyst would be needed to move the needle that much in
a short period. Such a catalyst over the holiday period would not probably happen and if there was
one the chances of it being negative would be far greater.
However, I do see stocks moving higher going into the first months of 2014 now that we have some
semblance of stability in Washington. Additionally, seasonality is favorable for equities up to the
end of April.
This will be my last commentary until 1/4/2014.
Have a Merry Christmas and a Happy and prosperous New Year!