FYI | Dec 03 2010
By Greg Peel
The Australian stock market is already in the wind-down towards Christmas and the traditional January break. Thoughts have turned to Christmas parties and lunches and then to lying on a beach. It is a time when turnover volumes subside somewhat.
The winter Christmas holiday in the US is nevertheless only a brief affair. With no Boxing Day holiday Americans can be working on Christmas Eve and back again the day after Christmas if the holiday falls midweek. This year it falls on a Saturday however, so the NYSE has elected to close on Christmas Eve. But given America works on a calendar financial year, December turnover does typically diminish in volume as trading winds down towards books-close. No point in blowing it at the last hurdle.
This means a diminished level of liquidity in the market and as such December can be volatile. Weighing heavily on December 2010 is the fact the S&P 500 hit a new post-GFC high in November and despite the Europe-led stumble since, is now not far off regaining that level. Such strength is significant, as commentators are now highlighting the fact that as a whole, US investment funds remain underweight equities.
As respected trader Dennis Gartman notes, investment funds might be unpopular if they lose more money than the market in a downswing, but they are pilloried if they fall short of the market in an upswing. Given they will have to publish their full year returns after the December 31 close – and such numbers will determine what sort of funds flows they will start the new year with – a suddenly more bullish stock market is putting underweight funds in a vulnerable position.
“As the year ends,” says Gartman, “rest very much assured that those who are managing long-only mutual funds and who find themselves behind their own benchmarks shall be more and more under pressure to play catch-up.
“There are lots of lots of managers [currently underperforming] and the pressure to catch up will be high and rising through the first two or three weeks of the month”.
If tonight's US jobs number is on the money or better than expected, then a scarcity of data releases next week will leave Wall Street open to more upside volatility as volumes wane. And there are quite likely still some shorts hanging on.
A weak number would take a bit of wind out of the sails, but either way the US has now become a lot more optimistic about its own economic outlook combined with a central bank policy of trying to engineer a stock market rally, by hook or by crook.
