Will profit taking factor into a decline in January?

World Outlook
The Abu Dhabi Investment Authority is trying to null an agreement to buy $7.5 billion of Citigroup Inc. stock at eight times today’s price, saying Citigroup misled it about the investment. Paying eight times today’s price after the market collapse certainly causes one to wonder about Abu Dhabi business sense.

Some of the central bank buyers of gold may be sending the strongest signal to sell it, if past performance is indicative of future results. The central banks tend to buy high and sell lower.

Market Outlook:
Most people and funds trade too frequently to care about long term gains vs. short term gains but with index investors they buy and hold unless they need to extract some of the gains to cover expenses. If they wait until January 4, 2010 to sell they can use or reinvest the gain tax-free until April 15, 2011 when taxes come due. Is that enough incentive for a January sell-off after 50% gains since March? While one may doubt that, studies do show that major higher market years tend to be followed by average lower market years and major down market years are followed by average up years. A DOW correction of 1000 points (25%) sometime in 2010 would be entirely typical of the market oscillations seen after rallies similar to 2009. The percentage swings in the S&P and NASDAQ are even greater. The fear of a market reaction could be an explanation of why so many people have moved into bond funds and short-term options hedging. Yet if inflation becomes a reality bonds will be the big losers. Inflation will however revive the real estate market.

This Week
Demand for the weekly 3- and 6-month bill auctions continues to be strong. Despite very large auction sizes, coverage for both auctions was over 3.60. Low bid for the 3-month bill was once again zero. The average rate was at the low rate of 0.4%. The dollar regained strength causing commodity prices to decline and stock averages to decline around the world.

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted. This increase followed a 0.6-percent decrease in September and a 0.3-percent advance in October. That is a rapid acceleration in wholesale inflation.

The Empire State Manufacturing Survey, conducted by the New York Federal Reserve, indicates that conditions for New York manufacturers leveled off in December, following four months of improvement. The general business conditions index plunged 21 points, from 23.6 to 2.6. The indexes for new orders and shipments also fell close to zero.

Industrial production rose 0.8 percent in November, a sign of recovery taking root in some parts of the economy. The gain shows that businesses and consumers are spending more, clearing inventories and spurring factories to produce more goods.

The homebuilder's housing market index fell 1 point in December to 16, now 3 points below September which, though very weak, was the highest reading so far in the2009 housing recovery. The report says credit conditions remain very tight and that questions over job security are keeping potential buyers from taking advantage of government incentives. Today's results point to a decline in existing home sales which, had begun to recover. Existing home sales for November will be posted Tuesday next week.

Wednesday, Dec. 16:
Consumer Price Index
New home starts
FOMC anncmnt

Thursday, Dec. 17:
Unemply Claims
Leading Econ Index
Phila Fed Index

Friday, Dec. 18:
Quadruple-witching expirations.

Market forces December 16
We estimate the NYSE must still rise 2.8% from yesterday's close to be interpreted as a continuing rally not a declining head and shoulder sell signal. That reflects both the price change and volume of shares being traded. The market still looks like it is topping out. In any event after a possible year end rally a normal -3% to -5% downward correction would be due anyway… so it is still wise to take profits were possible. If the head and shoulders sell signal occurs the correction could be closer to -10% to -25%.

Asian markets were down over night; China down -0.6%, Hong Kong down -0.9%, India up 0.2%, and Japan up 0.9%.

European markets are up with the average in a range from 0.2% to 0.8% this morning about half way through their day.

US pre-market futures up by about 0.4% today at 8:30 AM EST.