"It makes total sense to take some money off the table. We've priced in no policy mistakes. We've priced in no market accidents, and we've ignored all sorts of political issues,"
-Mohamed El-Erian, Chief Economic Advisor, Allianz SE
The very annoying focus on the 20,000 level of the DJIA continues this morning. Early indications are that it will not fall at the open but, hopefully, it will be out of the way soon and the focus will turn to more meaningful news.
The 20,000 level is receiving such intense scrutiny that it is inevitable that it will be taken out quickly, but the much more important issue is: then what? Does the breach of the 20,000 indicate that there is more upside coming, or will it be a "sell the news" event?
Stocks in Europe are not playing psychological games with a big round number and are more concerned about problems with some Italian and Spanish banks. That is pushing overseas markets down and triggering some minor profit taking.
Oil is up on President Obama's last-minute move, which was joined by Canada, to limit drilling in the Artic. The dollar is slightly weaker and bonds steady.
Pundits like PIMCO's Mohamed El-Erian, who is quoted above, are growing louder with the concerns about how much further this market can run. The PE ratio of the Nasdaq 100 is now at 24.15 vs. 22.75 a year ago. This market is anticipating some good earnings growth and it is impossible not to wonder if expectations are too optimistic.
We can go on at great length about the fundamental challenges that El-Erian sets forth, but in the shorter term we are dealing with other factors that are driving the market. There are three main factors at work right now: We have the DJIA round number issue, end of the year portfolio position and tax planning. None of these issues are really driven by fundamentals.
Traders are also looking for some action in small caps into the end of the year. Thinner trading around the holidays tends to stir up speculative interest in small stocks that can move fast. That is aided by the "January effect", which causes stocks to bounce back after the pressure of tax loss selling is eliminated. That often occurs in the waning days of the year and is part of the reason that we so often have a Santa Claus rally.
While the bulls still have the momentum and the price action remains positive, it is important to keep in mind that there often are some bouts of profit taking at the very end of the year. Some folks are inclined to book their gains, for a variety of strategic reasons, and that can cause some surprise volatility.
There is a tendency to believe the market will just trend straight up to end of the year because no one is going to sell their winners and pay taxes. It doesn't work that way. Just consider how much money is in pension and 401K plans that isn't concerned with the timing of sales.
We have some minor pressure to start the day. The news flow from analysts has slowed quite a bit, so there isn't much driving individual stocks at the moment. The business reporting is mainly focused on Dow 20,000. Earnings from FedEx (FDX) are receiving some negative attention but Nike (NKE) is bouncing.