MarketView for December 21

Summary

It was another good day in a holiday shortened week as solid earnings and another increase in merger and acquisition activity underpinned a steady upward trend that reinforced the Street’s optimism for the coming New Year. The S&P 500's close is on the cusp of closing levels not seen since before Lehman Brothers collapsed in September 2008, an important psychological barrier at 1,255.

Financials led the way higher, continuing their December rally after underperforming the broader market for much of the year. Fund managers have been reallocating cash to equities from fixed income and reduced cash positions.

For example, Northern Trust, which has $657 billion in assets under management, recently reduced its cash allocation and increased investments in large cap equities and fixed income.

Adobe Systems closed with a gain of 6 percent at $30.93 after the company gave an upbeat forecast.  Massey Energy rose on expectations the company was lining up potential buyers. Massey ended the day up 1.2 percent to close at $52.45.

While the S&P on Tuesday closed a hair below the 1,255 level breached on September 19, 2008, it surpassed the September 12, 2008 close of 1,251, which was the session before Lehman's bankruptcy. In doing so, the S&P 500 notched another two-year high. The index has is up 6.3 percent for the month and is up 12.5 percent for the year.

The S&P 500 also broke through the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide earlier this month. In a technical world that means that the next stop could be the 76.4 percent retracement at 1,362. The exponential Relative Strength Index (RSI), though, suggests the S&P may be overbought in the short term. The RSI provides a measure of higher closes to lower closes over a given trading period and is closely watched by traders.

Elsewhere on the earnings front, Jabil Circuit rose 10.7 percent to close at $19.55 after it reported better-than-expected quarterly earnings and forecast a robust second quarter.

American International Group closed up 3.3 percent at $55.18 on rumors that the government plans to sell a large piece of its stake in the company in two stock offerings next year.

Martek Biosciences closed up up 35.6 percent at $31.67 after Dutch group DSM, the world's largest manufacturer of vitamins, agreed to buy Martek, a manufacturer of baby food ingredients.

About 6.26 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's estimated daily average of 9.65 billion. Volume is expected to be light throughout the holiday shortened week.

Dividends Rise Sharply

Companies making up the S&P 500 index have been raising their dividends rapidly and substantially when compared to the levels of 2009and the trend is likely to continue in 2011, according to Standard & Poor's. Dividend increases totaled 255 so far this year, up from 2009's 157, S&P said. Two-thirds of current S&P 500 dividend payers are expected to pay more in 2011 than in 2010, it said.

An S&P analyst estimated that increases could reach 290 next year. Nonetheless, these levels well below what they were 30 years ago. For example, a total of 371 companies paid dividends in 2010 compared with 469 in 1980.

The recovery in corporate earnings has made the dividend outlook more favorable, as well as record cash positions by companies, S&P said.

Companies best known for dividend payments include utility and telecommunications firms. Analysts said dividend payers are also likely to benefit from the extension of the Bush-era tax cuts.

The S&P utility sector is up just 0.4 percent for the year to date, while telecoms are up 10.4 percent for the year so far. Telecoms and utilities "are the highest-yielding issues ... but yields that are low historically are still competitive.

Among companies initiating or reinstating cash dividends in 2010 were Broadcom, Carnival, Starbucks, Whole Foods and Expedia.