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Wednesday Look Ahead: December Rally Could Continue in Thin Trading

Tuesday, 21 Dec 2010 | 7:50 PM ET

Existing home sales and revisions to third-quarter GDP are among the highlights for Wednesday's stock market, which could continue its quiet drift higher.

Massachusetts home
AP
Massachusetts home

Financial stocks led Tuesday's gains, rising 1.6 percent. The S&P 500 was up 7 points to 1254, the same level it was at when Lehman Brothers collapsed in September, 2008. The Dow rose 55 to 11,533, its highest close since Aug. 28, 2008.

Traders have mostly expected to see gains between now and the new year. The S&P is up more than 6 percent since the start of December, so far its best December performance since 1991.

"I guess that's where we are headed," said James Paulsen, chief investment strategist at Wells Capital Management. "It's still such a hard thing to interpret the last couple of weeks of December markets. I have been burned so many times as an asset manager in the last two weeks of the year on 'nobody home volume,' only to be reversed in the first two weeks of January. I hate this period of time because it's like a random shoot, whether it benefits you, or hurts you."

Paulsen said the improving data, even without Fed easing, would be enough to help the stock market gain. In the last two weeks, Wall Street strategists have issued bullish outlooks for next year's market, and on Tuesday, Goldman Sachs Asset Management CEO Jim O'Neill said in a note that stocks could gain 20 percent next year.

"I'm not going to be negative, but the bullishness is certainly increasing short-term risk," Paulsen said.

In the Treasury market, yields continued to slip after last week's violent swings. The 10-year was yielding 3.32 percent, its lowest level since Dec. 13. The dollar gained just slightly against the euro, which was at 1.3096.

Nike stock could also be a feature in a market that has built up a level of optimism about the consumer this holiday season. Nike shares tumbled after the bell Tuesday, after it reported better-than-expected earnings but disappointing future orders. Analysts had expected orders to exceed the 11 percent reported by Nike.

Economists expect to see third quarter GDP to be revised to a consensus 2.9 percent form 2.5 percent, when it is reported at 8:30 a.m. Existing home sales, reported at 10 a.m., are expected to expected to show gains of 6.5 percent. Mortgage applications data is also reported early Wednesday.

Oil Drill

A bubble up in oil prices could also catch attention Wednesday. Oil has been rising on a brighter economic outlook, and in late trading it crossed above $90 a barrelfor the first time since October, 2008.

"Tonight's report from the API has shown large draw-downs in crude oil and gasoline causing crude to jump over $90 per barrel," said John Kilduff of Again Capital in a quick note. "The weekly reports have been very supportive lately. These data have combined with improving outlooks for the economy and global demand. This fundamental support combined with market momentum and bullish sentiment is making for a formidable rally."

What Else to Watch

Treasury traders will continue to watch the action around the Fed's quantitative easing-related purchases, which it conducts at 11 a.m.

AP

John Briggs, strategist at RBS, said the action Tuesday was similar to Monday's action.

"In the morning the market would rally into the buybacks. Then we'd see better buying from foreign real money. Then after 11 a.m., the buyback came and went, and the activity dried up, and in the afternoon, the market leaked lower," he said.

The Fed bought $7.9 billion in Treasury securities Tuesday, under its total $600 billion plan.

"There was some selling in the mortgage market that helped pressure the market back lower towards the close," said Briggs.

Briggs said the biggest day for the market is Thursday, when the Treasury releases the schedule of its auctions for next week, and there is some important data reported that day. Weekly jobless claims and October durable goods are both reported Thursday.

"I think the information Thursday will set the tone for the rest of the year. It's pretty thin next week and then there's some auctions. If the data turns out weak, it wouldn't take much to move markets," he said.

Walgreen reports before the bell. Bed, Bath and Beyond and Micron report after Wednesday's close.

- Follow me on Twitter @pattidomm.

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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