Stocks Close Lower as Investors Remove Risk into Year’s End
Stock markets showed broad weakness into the end of the last full trading week of the year as market brace for the ending result of the US Fiscal Cliff negotiations which have yet to see resolution. Since the end-of-year deadline is fast approaching, investors elected to take positions off the table in order to avoid the massive increases in volatility that could be seen if liquidity thinned markets are caught off-guard with a negative surprise (i.e. no agreement reached).
The main beneficiary of this lack of optimism was the US Dollar, as traders look to limit exposure to stocks and limit risk exposure into the end of the month. The S&P 500 did manage to close just north of 1400 on Friday but the latest drop erased the gains that had been posted in December and this equates for a yearly advance of just below 12%.
Trading volumes have seen massive reductions in recent sessions, with activity in many of the large stock indices at roughly 30% below their monthly averages. Declining trading volumes can have one of two effects, either slowing down price momentum to a near halt or creating the possibility for large gapping moves if a large order is entered into the market or if a surprise event risk is seen. This year, the outcome for the Fiscal Cliff negotiations does have the potential to jar markets if there is no evidence of a resolution.
Looking Ahead to the New Month, Quarter and Year
Taking a step back to get a longer term perspective, the next major moves in the markets will likely come as a result of the consumer spending numbers that were tallied in the 2012 holiday season. So far, the numbers have been most encouraging for online retailers (such as eBay and Amazon), and for shipping companies (like FedEx and UPS). Most of the analysis thus far has been based on the record daily performance that was registered during Cyber Monday this year but we will need the more detailed official reports before a true confirmation of this trend can be seen.
Healthy retail numbers should keep markets supported through January as analysts will make the argument that the global recovery is on track and that consumer spending habits will keep corporate earnings at elevated levels. With this in mind, macroeconomic data releases will start to take on a higher level of importance in the first quarter, and spread betters will need to watch these figures to get a sense of the next major trend we will be seeing.
This week’s declines in the S&P 500 have brought the index to some critical support levels, making the next few sessions critical for determining medium term direction. At current levels, prices are dealing with the 200 day EMA, as well as the 61.8% retracement of the rally from 1340. So if next week we can see a daily close below current levels, expect an additional drop of roughly $40 before any real support is expected to re-enter the market.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.