MarketView for December 29

Summary 

The markets rallied and the major equity indexes moved the needle into the green across the board on Thursday on the next to the last trading day of this year. In particular, the S&P 500 climbed slightly above its 200-day moving average, a key measure of the market's long-term momentum, but scant volume increased volatility, thereby giving the bears a reason to salivate, when what they really should be doing is hibernating.

For the year, the Dow Jones industrial average is up 6.1 percent and the S&P 500 is up 0.4 percent, while the Nasdaq is down 1.5 percent.

However, as any bear is quick to point out, Europe's sovereign debt crisis has been of primary concern for much of 2011. Mixed results at the latest Italian bond auction was another sign that the bond markets continue to remain worried with regard to the euro zone. However, Italian bond yields, which helped break a five-day rally with a sharp selloff in the last session, eased on Thursday after a debt auction. Nonetheless, the yield on 10-year Italian bonds hovered near 7 percent, a level markets see as a danger zone for Italy's government debt.

With trading thin, the only bit of suspense left is whether the S&P 500 will end positive for 2011 or not. It is now up 0.4 percent for the year, the closest it has been ending in an unchanged position for the year since 1970.

Banks were the day’s largest gainers along with commodity-related sectors, which sold off hard on Wednesday. JPMorgan Chase closed up 2.4 percent at $33.42. Caterpillar, often thought of as a reasonable barometer of the economy, ended the day up 1.4 percent to close at $90.58, while Alcoa, another popular indicator of manufacturing health, closed up 1.3 percent at $8.63.

Stocks added to gains after the euro erased losses against the dollar, rebounding from a 15-month low in thin trading.

Pending home sales rose to a 1-1/2 year high in November, offering more signs of a tentative housing recovery. In addition, factory activity kept growing in the Midwest in December, as purchasing managers reported rising prices and employment, even though production eased slightly.

On the down side, last week’s initial claims for jobless benefits rose more than expected, giving a mixed labor picture. The good news is that the four week moving average performed better than anticipated.

Recent economic data, including reports on housing, have been largely positive, contributing to stocks' gains over the past month and bolstering the view that economic growth is picking up steam.

Meanwhile, next up with regard to economic data will be the December payrolls report at the end of next week.

Amazon.com saw its share price fall 0.02 percent to $173.86. Goldman Sachs said the online retailer's sales growth in the current holiday quarter could miss expectations.

Diamond Foods rose 7.2 percent to $31.51 after CNBC reported rumors that high-profile investor David Einhorn may have invested in the company.

About 4.16 billion shares changed hands on the three major equity exchanges, although that number was well below the year's daily average of about 7.9 billion shares.

Pending Home Sales Rise

Pending sales of existing homes hit a 1-1/2 year high in November, the National Association of Realtors said on Thursday, offering more signs of a tentative recovery in the housing market. According to the NAR, its Pending Home Sales Index, based on contracts signed in November, increased 7.3 percent to 100.1 -- the highest level since April 2010.

Recent data on home sales and construction have been fairly upbeat, suggesting an improvement in the sector, but prices continue to trend lower.

The Economy is Leaving the Station and Picking Up Speed

New claims for jobless benefits rose last week but the underlying trend pointed to an improving labor market, while regional factory data showed the economy gaining momentum as the year ended. Initial claims for state unemployment benefits rose 15,000 to a seasonally adjusted 381,000, the Labor Department said.

Yet, the four-week moving average, a better measure of labor market trends, dropped to a 3-1/2 year low of 375,000 claims, the psychologically important point at which the economy is expanding and adding jobs. At the same time, the drop in the jobless rate to a 2-1/2 year low of 8.6 percent in November is helping to buoy consumer confidence.

Adding to the growth picture was the pending sales of previously owned homes that hit a 1-1/2 year high in November, adding to signs of a tentative recovery in the housing market.

Indications the economy was wrapping up the year on a much firmer footing than had been previously anticipated leaves it better positioned to deal with headwinds from the festering debt crisis in Europe and fiscal tightening at home.

A separate report showed the Institute for Supply Management-Chicago business barometer was little changed at 62.5 this month from 62.6 in November. A reading above 50 indicates expansion in the region's manufacturing. With new orders still strong; backlog orders, employment and supplier deliveries rising, the ISM-Chicago survey suggested a modest pickup in national factory activity from November.

The Institute for Supply Management will release its December survey of national manufacturing on Tuesday.

Other data showed the National Association of Realtors' Pending Home Sales Index, based on contracts signed in November, increased 7.3 percent to 100.1, the highest level since April 2010.

Pending sales lead existing home sales by a month or two.

Recent data on home sales and construction have been fairly upbeat, suggesting an improvement in a sector that has been the economy's weakest link, but prices continue to trend lower.

The economic data offset concerns about Europe and encouraged investors to buy U.S. stocks. Prices for U.S. Treasury debt rose, while the dollar was little changed against a basket of currencies.

While much of the global economy is slowing and the troubles in Europe are expected to push the region into a mild recession in 2012, activity in the United States has held up relatively well.

Fourth-quarter growth is seen topping a 3 percent annual pace, rising from the July-September period's 1.8 percent rate.

The euro zone crisis has seen banks tighten lending to major financial participants in recent months.

While the Federal Reserve's survey of senior credit officers did not mention Europe directly, it indicated a "broad but moderate tightening of credit terms applicable to important classes of counterparties over the past three months.