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We See This Week If It Was A Gold Friday Or Black Friday

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With just three weeks until year-end, market watchers are eager to see if Santa can deliver a stock rally extension heading into the home stretch. The S&P 500 notched new record highs on the last day of November before suffering a series of modest losses in the early days of December. The overall news flow is expected to be light in the week ahead, leaving much of the market to wring its hands ahead of the December 17-18 Federal Reserve meeting.

The central bank’s Federal Open Market Committee [FOMC] two-day meeting, and more specifically, the December 18 post-meeting statement, is expected to be a major sentiment driver. The Fed has to decide whether to start tapering its asset-buying program, which has greased the economy by holding down longer-term borrowing rates in conjunction with historically low short-term interest rate policy. Recall that the S&P 500 suffered a month-long  4.6% slide ending on June 21 as prospects for higher borrowing costs nicked both the stock and bond markets. The yield on the benchmark 10-year Treasury had rallied to 2.55% in June, up from a low 1.6% hit in April.

Tracking the Treasury Market

The yield on the 10-year Treasury is once again an important barometer for stock traders. The index can be tracked virtually in real time using the CBOE 10-Year Rate Index (TNX), shown in figure 1. TNX continued ticking higher through the summer, toward 3% in September, before falling back below 2.5% in late October and rebounding to as high as 2.86% since.

Another spike in Treasury yields could potentially drive up volatility in the equity market because not only does it reflect future “tapering” expectations, but because higher long-term rates typically have a negative impact on overall economic activity and business spending decisions. Indeed, the CBOE Volatility Index (VIX), a gauge of expectations about future volatility, has already moved up from less than 12.5 in late November to 15 in early December.

Figure 1: One-year CBOE 10-year Treasury Rate Index (TNX) through Thursday, December 5, charted on TD Ameritrade’s thinkorswim® platform. The 28.61 reached on December 5 translates to a 2.86% 10-year note yield, the highest since September. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

Coal in the Stocking?

The economic calendar holds a few noteworthy reports in the latter part of the week. The most significant is probably November retail sales figures due for release Thursday morning. The data will include early holiday shopping sales, which by most indications have been somewhat lackluster so far in 2013 (see the full schedule in figure 2).

Earnings reports won’t be much of a factor in the week ahead, but a few names are worth mentioning. Autozone (AZO), H&R Block (HRB), and homebuilder Toll Brothers (TOL) report Tuesday. Costco (COST) will be the name to watch Wednesday. Retailer Lululemon Athletica (LULU) and software firm Adobe (ADBE) release their results Thursday.

Other events to watch in the week ahead, agricultural commodities and ag-related companies might draw interest Tuesday when the USDA releases its latest crop report. Dow component Home Depot (HD) hosts an investor and analyst conference Wednesday. Marathon Oil (MRO) and DirectTV (DTV) also hold analyst meetings this week.

With heightened attention on the VIX, the market’s “fear gauge,” and on benchmark Treasury yields, financial markets are primed for what the Fed says come mid-December. Will the bank’s actions or words ring of a Santa rally or a Grinch let down?

Good trading,

JJ

@TDAJJKinahan

 

Figure 2: Weekly U.S. economic report calendar. Source: Briefing.com.

TD Ameritrade, Inc., member FINRA/SIPC/NFA.

Commentary provided for educational purposes only. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold. Past performance is no guarantee of future results or investment success.

Supporting documentation for any claims, comparison, statistics, or other technical data will be supplied upon request.