In an extremely quiet fashion, the market entered the final sessions of 2008. At close, all three major indices ended modestly higher while the volume was less than half of a typical trading day. Will we get a Santa Claus Rally between now and the end of the year? Last year, the S&P 500 declined 2% in the final week, which in hindsight is not a good sign for 2008. Hopefully we will not face the same problem this time around.
With 2008 quickly running out its course, I will list some of the most unimaginable events of the year here. History will remember them:

1. All five big US investment banks are gone in 2008. Of course, some are voluntary and some are involuntary.
2. Several biggest commercial banks saw their companies near collapse. The list included names such as Citi and RBS. By the way, can one imagine Citi changing hands at $3 a share at the beginning of the year?
3. Two biggest GSEs along with the biggest insurance company were taken over by the government before they filed bankruptcy. Their stocks have lost over 95% year-to-date.
4. The benchmark S&P 500 lost over 40% so far in the year, making it the worst annual performance since the Great Depression.
5. The Fed cut the interest rate to 0%-0.25%.
6. The yields on the 10-year Treasuries dropped to 2%. And for the first time in half a century they are below the dividend yield in the S&P 500.
7. Oil price surged to $147 a barrel before it tumbled more than 75% during the final months of the year.
8. A global recession is on the horizon and the US GDP is expected to fall at a pace of 4 – 6% during the final quarter. At the beginning of the year, the most pessimistic views among economists were forecasting a slowdown to 2% growth.
9. For the first time in 14 years, the money market fund “broke the buck” as it was traded below $1. Although so far investors are still able to get their principals back in full, it shows once again that at extremes, those previously considered risk-free assets can become risky as well.
10. The Big Three US auto makers are close to file bankruptcy.

Market is closed for Christmas Holiday.

Office is closed for Christmas Holiday.

The market dropped for the second straight session. The trading volume was extremely light ahead of holiday. On the one hand, there is simply no positive economic news to cheer investors up. And things will probably get a lot worse before they turn the tide. On the other hand, both monetary and fiscal policies are extremely accommodating these days, which gives investors at least some hope that things may not get as bad as the Great Depression. Psychology also plays an important role. We should remind ourselves that at both extremes, the majority is always wrong. Back in 2005 when the real estate boom is at its height, people would assume that there would never come a day that the value of a house would decline. And during the aftermath of the Nasdaq bubble, people would think that all tech companies would be dead. Currently most people think the house price will continue to decline and the stock price will drop further in 2009. Will they be right this time?
Let’s take a look at the three key indicators: 1. VIX: closed at 45.02 compared to 44.56 yesterday. 2. The euro/yen cross: closed at 126 compared to 126 yesterday. Trading was extremely light as many traders took the week off; 3. The TED spread: closed at 147 bps compared to 147 yesteday.
Most major sectors finished the session lower led by transportation and consumer cyclical. The CRB commodity index was little changed. The US dollar was higher against most major currencies while treasuries dropped. The three-month US LIBOR was unchanged at 147 bps. The VIX index was little changed. The market breath was negative on both NYSE and Nasdaq and the volume was very light.

The market ended this Monday modestly lower. By close, the Dow gave up 60 points while the Nasdaq declined around 2%. Interestingly, during the past five trading sessions, most major indices were essentially unchanged. The rally due to the massive interest rate cut by the Fed last Tuesday was all gone. What we stated one week ago shall remain hold: Investors these days seem to constantly switch their moods between fears of a deepening recession and hopes of massive stimulus plan from the new Congress and administration in January. In addition, with holidays and the end of the year moving closer, investors are cautious of betting heavily on either side of the table. As a result, volume will stay on a relatively low basis for the remaining trading sessions.
Let’s take a look at the three key indicators plus the one credit indicator I added several weeks ago: 1. VIX: closed at 44.56 compared to 44.93 last Friday. This is a little troublesome as the VIX has dropped over 20% during the past week while the major indices were little changed, indicating either investors become complacent again or a relatively quiet period around holiday is expected. My fear is it could be the former; 2. The euro/yen cross: closed at 126 compared to 124 last Friday. Conclusion: improving; 3. The TED spread: closed at 147 bps compared to 150 last Friday. Conclusion: improving. 4. The iTraxx basket spread: closed at 684 bps vs. 780 bps in the previous week. Conclusion: improving. As we can see here, the credit market did improve quite significantly in the past few weeks. If the trend can continue, it should bode well for the equity market going forward.
All 10 major sectors finished the session lower led by energies and basic materials. The CRB commodity index dropped 2.5%, the fourth straight decline. The US dollar was higher against most major currencies while treasuries dropped. The three-month US LIBOR dropped 3 bps to 147 bps. The VIX index was little changed. The market breath was negative on both NYSE and Nasdaq and the volume was relatively light.