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Will taper set the stage for a Santa rally? Traders hope so

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Now that the U.S. federal budget has been settled, and the Federal Reserve has begun the taper, the issue for traders is how much of a "relief rally" might be combined with the traditional "Santa Claus rally."

One thing's for sure: technical indicators are very strong. The major indices are at historic highs, just over some nice, round numbers (Dow above 16,000, S&P 500 above 1,800, and the Nasdaq comfortably above 4,000). There was a HUGE jump in volume (30 percent above average at the NYSE, highest since September), and 5 to 1 advancing to declining stocks at the NYSE.

And there will be even bigger volume tomorrow...in fact, it could be the heaviest volume day of the year.


There will be: 1) quadruple witching expiration (the quarterly expiration of stock and index futures and options), 2) the quarterly rebalancing of the S&P 500, and the S&P Midcap and Small Cap indices, and 3) the Nasdaq rebalancing, which only occurs once a year.

The S&P rebalancing will see the most volume churn, with 224 issues increasing their share count and 249 decreasing them. Here's an indicator of the influence of buybacks: the share count will decrease by 0.46 percent.

General Motors will have the most to buy, Apple and Exxon will have the most to sell, thanks to extensive buybacks.

Speaking of volume....Facebook will have it in spades. They smartly announced a 70 million share offering (including 41 million offered by CEO Mark Zuckerberg), now that the lockup period is expiring. Why is this smart? Because Facebook is also going into the S&P 500 tomorrow, and there will be huge demand for shares from those required to replicate the indexes. Many more than the 70 million shares in the secondary.

Elsewhere

1) A day after the Fed announced it tapering program, there is a fairly large Permanent Open Market Operation (POMO) program today. At 11 PM, the Fed will purchase $1.25 to $1.75 billion in notes--a fairly typical number. Yet in the 2 pm hour, the Fed will purchase an additional $4.75-$5.75 billion in notes. That is unusual.

2) Will there be a pickup in corporate spending? Credit Suisse's Andrew Garthwaite's has named a pickup in corporate spending as one of the big macro themes that will emerge in 2014. Let's hope so, but so far that is not in evidence.

Just look at what came out of General Electric's annual investor meeting yesterday: more cost cutting, dividend hikes, buybacks and promises of an improvement in topline--but not a lot of spending.

By CNBC's Bob Pisani

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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