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Should We Prepare for the Dow 20,000 Party Yet? Markets Tread Lightly

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December 28, 2016

(Wednesday Market Open) The numbers are mostly moving higher again today as the traders who are out there—and yesterday saw the lowest daily trading volume in any full session all year—continue to help push major benchmarks into or near record territory.

The Dow Jones Industrials (DJIA) is again flirting with that psychological 20,000 milestone, which may prove to be not so magical after all considering it’s just a number. Analysts are torn on whether it will pass that marker before the week, and, of course, the year is out. Given the on-again/off-again pattern we’ve seen in recent sessions—it came within 20 points of reaching it yesterday—it appears to still be a crap shoot.

In the early going, DJIA needed 55 points to cross that threshold. Will it happen today?

The Nasdaq Composite (COMP) veered into uncharted territory when it rose sharply in the first half hour of trading yesterday to top 5,512.37 before falling back, but still closing on record turf and in advance mode again today.

And the S&P 500 (SPX) considered by many, including me, to be the most important index because of the large number and broad range of equities that it includes, also edged higher yesterday and was inching ahead in early action today.

As we’ve noted before, this week is a time to take stock of your portfolio, see if the balance is what it should be going into 2017 and make any necessary tweaks. It’s also a time to think about the tax implications of what’s in your portfolio now and into next year.

And as our senior trading specialist T.J. Neil has said in these pages, “Just because the markets are open doesn’t mean you have to trade.”

This week is traditionally considered a “holiday” market, typically marked by thinly traded, choppy action. During periods like this, the lower liquidity in the markets can lead to volatile swings or a whole lot of nothing in direction.

“This time of year can be a great time to reflect on the past year and prepare for the upcoming one,” Neil wrote earlier this month. “You may wish to research new trade ideas, learn a new strategy, and review your trades from the past year. For example, a new administration will move into the White House in January, so it may make sense to do some research on how possible policy changes might affect the market in the coming year.” 

S&P Chart

THE STALL.

The S&P 500 Index (SPX), plotted here through Tuesday on the TD Ameritrade thinkorswim® platform, appears to be pausing in its move to the upside. The 14-day relative strength index at 80% sits at 2,339.49 and the index sits just above its 20-day moving average of 2,242.23. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Is the Dollar on Fire Again? The dollar appears to have taken on a life of its own since the November presidential election, exploding in tandem with the stock market and, surprisingly, with the price of crude. Typically the dollar and the cost of crude oil, which is traded in dollars, move inversely to each other. That hasn’t been the case in weeks, with the ICE U.S. Dollar Index (DXY) closing at a 14-year high of 103.03 and marching forward again today.

A stronger dollar is largely considered a sign of economic optimism and a potential boon to consumers because of cheaper import prices. However, the other side of the coin may unearth new issues for U.S. manufacturers trying to sell products abroad that are likely to become pricier because of a stronger dollar. Stay tuned to multinational businesses’ 2017 forecasts for a clearer read of what may be ahead for them.

Oil’s Rally Continues. Meanwhile, West Texas Intermediate (WTI) crude oil prices climbed to an 18-month peak, up 1.6% to $53.89 yesterday, as the year-end rally appears to carry on. In early trading, prices were flat.

Analysts note that crude prices are gaining support just days ahead of the Jan. 1 start date of tightening supplies, thanks to the deal agreed to by members of the Oil Producing Exporting Countries (OPEC) and non-OPEC producers.

Though there still is concern that the deal may fall apart before the full six-month duration ends, analysts note that the rising price puts oil at a pivot point as it approaches $60 a barrel. Plus, while the typical inverse relation to the dollar and oil may seem counter intuitive, some analysts point out that even at $53 a barrel, the price is double and then some to where it stood in February, when it hit a 13-year low at $26.05 per barrel. What’s more, it’s about half of what it was in June 2014. Could the price of oil finally be in correction mode?

Good News on the Homefront? Home prices continue to keep climbing back to where they were just before the economy tanked, according to the monthly S&P CoreLogic Case-Shiller U.S. National Home Price Index released yesterday. The index, which covers the nine U.S. census divisions, turned in a 5.6% annual gain in October, the latest numbers available. That put the measure at a record 185.06, surpassing last month when the metric first exceeded the 2006 peak levels, and charting the biggest monthly gain since July 2014.

But here’s the potential problem, Case-Shiller points out: affordability as the prices are outpacing percentage wage gains and rising faster than inflation. “Home prices and the economy are both enjoying robust numbers,” David Blitzer, chairman of the S&P index committee, said in the press release. “However, mortgage interest rates rose in November and are expected to rise further as home prices continue to outpace gains in wages and personal income. 

“Affordability measures based on median incomes, home prices and mortgage rates show declines of 20% to 30% since home prices bottomed in 2012,” he added. “With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends.

“Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely,” he said.

Good Trading,

JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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