12.19.2016
By John D'Antona

TRADING THE WEEK: Santa Claus Rally Continues as Dow Tests 20,000

The stock market is giving investors an early holiday gift – rising volume and valuations as the seasonal “Santa Claus” continues.

Trading on U.S. equity exchanges rose again as traders opted to stay active for another week. Trading levels averaged 7.85 billion shares per day for the week ended December 16, according to Bats Global Markets data. That’s compared to an average of 7.57 billion shares in the week ending December 9.

According to William Mingione, managing director and head of equities at New York-based Drexel Hamilton, the market seems to waiting and wanting to breach the 20,000 level and it is just a matter of time given market optimism.

william_mingione

William Mingione, Drexel Hamilton

“We have been inching closer to the realization of Dow 20K and breaking out the new hats,” Mingione told Markets Media. “Equities continue to build on post-election momentum.”

Looking back, the dollar reached its strongest level since January 2003 and WTI Crude started last week on a high note with a new OPEC deal rising to a 17-month high but not before losing some of its momentum as the week progressed. Regardless of ending levels, he reminded that WTI is still up 15% in 2 weeks.

Market optimism also got a boost from the Federal Reserve which raised short-term interest rates 25 basis points – the first such increase in a year.

“The market seems to have swallowed that (interest rate hike) with no problem as it was expected,” Mingione said. “The Fed did say they expect to make 3 moves now next year and not the 2 they previously signaled. This has the financial sector off to the races again.”

He explained that banks in general have a lot more in deposits on their balance sheets than usual and the increase in rates bodes well. For example, every ¼ point hike in rates equals approximately $1 billion in pretax earnings for Bank of America.

“There’ not much on the calendar for this week as many of the exchanges will slow down in anticipation of the Christmas holiday,” Mingione added.

This leaves the market subject to some intra-day price swings but doesn’t change the upward bias may investors feel, he added. But with the New Year historically bringing the seasonal “January effect” rally and the inauguration of President-elect Donald Trump, equities look to be headed higher.

In other market news, the National Stock Exchange was purchased by the New York Stock Exchange after it was preparing to shut its doors.

The NYSE, which operates and has three exchange licenses, now has acquired fourth in the NSX. NSX will remain open for business after filing for closure on December 9th. As a result, subject to Securities and Exchange Commission (SEC) approval, NSX will continue to operate as a licensed National Market System (NMS) exchange, and no longer has plans to cease trading on December 16 as it previously announced.

According to an NYSE spokesperson, NSX will be the only pure exchange under the NYSE umbrella that focuses purely on trading. NYSE, NYSE MKT and NYSE Arca Equities – which have unique market models designed for corporate and ETP issuers.

“The NYSE is focused on providing the best quality equity markets for corporate and ETP issuers, as well as investors. NSX will continue to operate as a trading-only venue serving market participants’ needs as they evolve,” said Tom Farley, NYSE President.

The transaction is expected to close in the first quarter of 2017, subject to customary regulatory approvals. Terms were not disclosed and the financial impact will not be material to ICE.

Also, the Bank for International Settlements warned that new margin requirements for uncleared derivatives could raise costs and encourage a shift of more interest rate trading onto exchanges and into central clearing.

The new variation margin rules for uncleared over-the-counter derivatives will come into effect on 1 March 2017 and will immediately apply to a wide variety of counterparties including a variety of dealers, buyside firms, pension funds and corporates. The initial margin rules came into force in September this year for the largest swap dealers in the United States, Japan and Canada, and the next phase begin in January 2017. Margin rules will be implemented in Europe and Asia next year.

This Week’s U.S. Economic Indicators of Interest:

Monday Purchasing Managers Flash report
Tuesday Janet Yellen Speaks

Redbook Retail Sales

Wednesday Existing Home Sales
Thursday Jobless Claims

Durable Goods

GDP

Personal Income

Chicago Fed Report

Friday New Home Sales

Consumer Sentiment

Jeffrey Lacker Speaks

 

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