The Week Ahead: Will the Grinch Steal Christmas?
The warning flags are up, and time is running out for a solid rally. Be careful, and watch these key indicators over the next few weeks to see where the wind is blowing, writes MoneyShow.com senior editor Tom Aspray.
Friday's final triple-witching day of 2011 was pretty quiet overall. Despite generally good news for the US economy, stocks closed lower for the week. This makes me wonder whether the Grinch has already made his bet that stocks will finish the year on a weak note.
The short-term technical picture has deteriorated, and as I discuss later, it could turn negative early this coming week if stocks fail to mount a good rally. Analysis of the Volatility Index (also known as the "fear index") both in the US and in Europe suggests that even the most strident bears are not expecting the market to plunge going into the end of the year.
Some measures of the Euro debt crisis actually improved last week, even though many are still concerned that the recent central bank action and summit agreement may not be enough. IMF head Christine Lagarde did not paint an optimistic picture of the global economy on Friday, forcefully arguing that all countries needed to help Europe in order to avert an even worse financial crisis.
In an interesting Bloomberg TV interview, legendary interest-rate expert Jim Grant dispelled that notion that European central banks are doing little, as in reality they are printing massive amounts of money. Grant said that "in Switzerland, the Swiss National Bank has been growing its assets over the past three months at a rate of in excess of 300%."
If this is indeed a global trend, then the longer-term inflation implications are huge???but investors should also realize that a gradual rise in the rate of inflation is bullish for the stock market.
Clearly, last week's US inflation numbers were weaker than expected, and there's no sign yet of a major rise on the horizon. Many are more worried about deflation, like what has crushed the Japanese economy since its stock market peaked in 1989.
Last week's action in the gold market certainly did not reflect inflationary fears. The SPDR Gold Trust (GLD) was down over 7% for the week. I had warned beginning in August that gold was quite vulnerable to a sharp decline, based on Starc bands as well as my long experience in the gold market that it was quite vulnerable to a sharp decline. (Keep reading for my latest updates to that forecast.)