FISCAL CLIFF: SANTA GOES TO WASHINGTON

It's bad enough having the fiscal cliff hanging in the balance, but does it have to come over the holidays? They say bad news comes in all shapes, times and places, it's just that this bad news is sure to affect a lot of Americans right where it hurts, in the wallet.

Over the last several weeks indecision has led to a rally in the S&P 500. When everyone got too bearish and sold at low prices, the S&P rallied. But it's not just a short covering rally / short squeeze, it's much, much more. It's all the positive seasonalities — the best 6 months for stocks from November to April; the December expiration, which is one of the most bullish quarterly expirations of the year; positive signs from the fiscal cliff talks; the Santa Claus rally, which falls on the last four trading days of the year and the first two days of the new year; and last but not least, the January effect, where investors buy the small cap stocks going into January. Also over the last several weeks, many of the big investment / mutual funds have been selling losing positions and adding to the winners.

Christmas is just around the corner, and with the exchange open just half a day on Christmas Eve, most traders on Wall Street and with the CME Group will more than likely leave earlier this week to take advantage of the holiday. Members of Congress also would like to take some extra time off, and that means actually dealing with the fiscal cliff. Over the last few days the president has started to back off on some of those ironclad positions and House Speaker Boehner was handed his Christmas / year end present, a new offer on the threshold of 400,000 and lowering his 10-year tax revenue goals from $1.6 trillion he had been pushing for a few weeks ago. Obama has also abandoned his demand for a permanent borrowing authority and wants to replace it with new debt limits that would last for two years.

MrTopStep has been saying for weeks that the risk has been to the upside. We felt there was too much at stake and that most of the government infighting would conclude with positive results. It's not over yet, but at least there is compromise in the air.

This is the same chart we put up yesterday, but we extended it out into April. As you can see, the S&P actually sold off down to 1202 on Dec. 19 and made a new high at 1422  on April 2. In the last couple of days many well-known traders have come out saying the S&P is going higher into the end of the year and into the New Year. We do not doubt that the S&P can press higher, but we do not agree that the S&P will have an extended rally in the first quarter like it did last year, when it went up for 3 months in a row. In fact, we think there could be some type of letdown. …

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view:
No one has said anything, but how about the Pit Bull's rule about looking for a low the Thursday or Friday the week before the expiration? Late last Friday the SPH made a 1406 low and as of this morning an early high at 1433.75, a 28-handle rally.  Maybe some people are non-believers, but I have seen this work too many times to overlook it. As for today, we think it will be a two-way trade: sell the early rally and then buy weakness. As always, keep an eye on the 10-handle rule and please use stops.  

• It's 7 a.m. and the ESH is trading 1433.75, up 6.75 handles; crude is up 62 cents at 87.82; and the euro is up 21 pips at 1.3193.
• In Asia 7 out of 10 markets closed higher (Shanghai Comp. +0.10%, Hang Seng -0.08%)
• In Europe 10 out of 12 markets are trading higher (CAC -0.04%, DAX +0.39%)
• Today's headline: “Stock Index Futures Set to Open Higher on Fiscal Progress”
• Economic calendar: Today:  Current account, housing market index, 5-yr note auction, Fed's Fisher speaks; earnings from Oracle. WEDNESDAY: MBA mortgage apps, housing starts, oil inventories, 7-yr note auction; earnings from FedEx, General Mills, Accenture, Bed Bath & Beyond. THURSDAY: GDP, jobless claims, corporate profits, existing home sales, Philadelphia Fed survey, FHFA home price index, leading indicators, Fed balance sheet/money supply, UPS busiest day; earnings froM CarMax, ConAgra, Darden Restaurants, Discover Financial, Rite Aid, Nike, RIMM, Micron. FRIDAY: Quadruple witching, personal income & outlays, Chicago Fed activity index, consumer sentiment, BLS state employment stats; earnings from Walgreens
• Globex volume: 85k ESZ, 2mil ESH and 56k SPZ and 50k SPH traded
• Fair value: S&P +10, NASDAQ +22.25

MrTopStep Closing Print Video: http://www.mrtopstep.com/closing-print-12-17-2012/
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