S&P 500 CLOSES ON A TWO-MONTH HIGH; FITCH WARNS

The S&P 500 futures closed at a two-month high as signs that the Republicans and the president are trying to come to terms over the pending fiscal cliff. The S&P futures have closed higher two days in a row for a total gain of 35 handles. 

After being down nearly 8% from its September high, the S&P is up 6.9% since its November low. Yesterday the S&P futures marched higher for a second day, backed by a 2.3% gain from the homebuilders index, which climbed to the highest level in six years. The S&P cash closed up 1.2% and the Dow jumped 0.90% to 13,350. The market's overall tone has changed over the last few days as the positive seasonalities take hold and the government tries to reach a deal. As with many economic events over the last few years, the markets are fixated on the fiscal cliff. We believe once the the terms are decided it will just be another bump in the road for the stock market's comeback. Over the last several years the public has shied away from buying stocks and many feel that once the fiscal cliff negotiations are decided the public may start to get back in the market again.

Today rating firm Fitch warned that there is an increased likelihood that it could strip the U.S. of its triple-A status if Washington does not prevent the $600bil of tax hikes and spending cuts from kicking in next year. This has been something we have talked about for weeks. Fitch said in its 2013 global outlook published on Wednesday that the “Failure to avoid the fiscal cliff … would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the U.S. into an avoidable and unnecessary recession. That could erode medium-term growth potential and financial stability. In such a scenario, there would be an increased likelihood that the U.S. would lose its AAA status.”

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: The S&P futures have been back and filling on all the pullbacks almost like they know something positive will result from the fiscal cliff talks. What we are worried about is what happens when they announce the compromise. As for today, we lean to selling the early rally and then buying weakness. I said the S&P could go to 1450 on Monday's close, I just didn't think it would come so fast. As always, keep an eye on the 10-handle rule and please make sure you use protective buy and sell stops when trading futures.

• It's 7 a.m. and the ESH is trading 1444.25, up 3.25; crude is up 62 cents at 89.02; and the euro is up 77 pips at 1.3308.
• In Asia 9 of 11 markets closed higher (Shanghai Comp -0.01%, Hang Seng +0.57%)
• In Europe 10 out of 12 markets are trading higher (CAC +0.44%, DAX +0.21%)
• Today's headline: “Fitch Warns U.S. Could Lose AAA Status”
• Economic calendar: Today: 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 and earnings from Walgreens
• Globex volume: 874k ESZ, 2.49mil ESH and 66k SPZ and 62k SPH traded
• Fair value: S&P +3.75, NASDAQ +11.5

MrTopStep Closing Print Video: http://www.mrtopstep.com/closing-print-12-18-2012/
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